Published October 15, 2020
| Submitted
Discussion Paper
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Background Risk and Small-Stakes Risk Aversion
Chicago
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Abstract
We show that under plausible levels of background risk, no theory of choice under risk---such as expected utility theory, prospect theory, or rank dependent utility---can simultaneously satisfy the following three economic postulates: (i) Decision makers are risk-averse over small gambles, (ii) they respect stochastic dominance, and (iii) they account for background risk.
Additional Information
We want to thank Ned Augenblick, Nick Barberis, Sebastian Ebert, Armin Falk, Stefano DellaVigna, Paul Heidhues, Matthew Rabin, Todd Sarver, Charlie Sprenger and Juuso Välimäki for helpful comments and discussions. Xiaosheng Mu acknowledges the hospitality of Columbia University and the Cowles Foundation at Yale University, which hosted him during parts of this research. Omer Tamuz was supported by a grant from the Simons Foundation (#419427), by a BSF grant (#2018397) and by a Sloan fellowship.Attached Files
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Additional details
- Eprint ID
- 108298
- Resolver ID
- CaltechAUTHORS:20210303-154333226
- Simons Foundation
- 419427
- Binational Science Foundation (USA-Israel)
- 2018397
- Alfred P. Sloan Foundation
- Created
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2021-03-04Created from EPrint's datestamp field
- Updated
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2023-06-02Created from EPrint's last_modified field