- Small- and large-stakes risk aversion: implications of concavity calabration for decision theory
- Games and Economic Behavior
- Volume | Issue number
- 56 | 1
- Number of pages
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
A growing literature reports the conclusions that: (a) expected utility theory does not provide a plausible theory of risk aversion for both small-stakes and large-stakes gambles; and (b) this decision theory should be replaced with an alternative theory characterized by loss aversion. This paper explains that the arguments in previous literature fail to support these conclusions. Either concavity calibration has no general implication for expected utility theory or it has problematic implications for all decision theories that involve concave transformations (utility or value functions) of positive money payoffs, which makes loss aversion irrelevant to the argument.
Keywords: Concavity calibration; Expected utility theory; Prospect theory; Risk aversion
JEL classification codes: C90; D81
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