Journal of Risk and Uncertainty

, Volume 35, Issue 1, pp 67–76 | Cite as

Risk aversion and expected-utility theory: A calibration exercise

Article

Abstract

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.

Keywords

Expected utility theory Asset integration Risk aversion Experiments Paraguay 

JEL Classification

D01 D81 O1 C93 

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Agricultural & Applied EconomicsUniversity of Wisconsin–MadisonMadisonUSA

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