Rabin (Econometrica 68(5):1281-1292, 2000) argues that, under expected-utility, observed risk aversion over modest stakes implies extremely high risk aversion over large stakes. Cox and Sadiraj (Games Econom. Behav. 56(1):45-60, 2006) have replied that this is a problem of expected-utility of wealth, but that expected-utility of income does not share that problem. We combine experimental data on moderate-scale risky choices with survey data on income to estimate coefficients of relative risk aversion using expected-utility of consumption. Assuming individuals cannot save implies an average coefficient of relative risk aversion of 1.92. Assuming they can decide between consuming today and saving for the future, a realistic assumption, implies quadruple-digit coefficients. This gives empirical evidence for narrow bracketing. © 2007 Springer Science+Business Media, LLC.
CITATION STYLE
Schechter, L. (2007). Risk aversion and expected-utility theory: A calibration exercise. Journal of Risk and Uncertainty, 35(1), 67–76. https://doi.org/10.1007/s11166-007-9017-6
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