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Background Risk and Small-Stakes Risk Aversion

delete2024-06-01
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OA
AI
X
Xiaosheng Mu *
L
Luciano Pomatto
P
Philipp Strack
O
Omer Tamuz
DOI：10.1257/aeri.20220480delete
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Abstract

Abstract

En 中文
Building on Pomatto , Strack , and Tamuz ( 2020 ), we identify a tight condition for when background risk can induce first -order stochastic dominance . Using this condition , we show that under plausible levels of background risk , no theory of choice under risk can simultaneously satisfy the following three economic postulates: ( i ) decision-makers are risk averse over small gambles , ( ii ) their preferences respect stochastic dominance , and ( iii ) they account for background risk . This impossibility result applies to expected utility theory , prospect theory , rank -dependent utility , and many other models . ( JEL D81, D91 )
Keywords:
PROSPECT-THEORY
CALIBRATION
ATTITUDES
DECISION

Journal

American Economic Review cover
American Economic Review
IF:
11.6
Papers:
5.0K
Citations:
7.5W

Organization

C
California Institute of Technology
Scholars:
2.9W
Papers: 2.5W
Citations: 4.9W
P
Princeton University
Scholars:
2.1W
Papers: 2.3W
Citations: 5.1W
Y
Yale University
Scholars:
6.5W
Papers: 6.0W
Citations: 10.0W
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