Background Risk and Small-Stakes Risk Aversion

Xiaosheng Mu
Xiaosheng Mu
Luciano Pomatto
Luciano Pomatto
Cited by: 0|Bibtex|Views3
Other Links: arxiv.org

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 (ii...More

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