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Rejecting small gambles under expected utility

Palacios-Huerta, Ignacio and Serrano, Roberto (2006) Rejecting small gambles under expected utility. Economics Letters, 91 (2). pp. 250-259. ISSN 0165-1765

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Abstract

This paper contributes to an important recent debate around expected utility and risk aversion. Rejecting a gamble over a given range of wealth levels imposes a lower bound on risk aversion. Using this lower bound and empirical evidence on the range of the risk aversion coefficient, we calibrate the relationship between risk attitudes over small-stakes and large-stakes gambles. We find that rejecting small gambles is consistent with expected utility, contrary to a recent literature that concludes that expected utility is fundamentally unfit to explain decisions under uncertainty. Paradoxical behavior is only obtained when calibrations are made in a region of the parameter space that is not empirically relevant.

Item Type: Article
Official URL: http://www.elsevier.com/locate/inca/505574
Additional Information: © 2005 Elsevier B.V.
Library of Congress subject classification: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Managerial Economics and Strategy Group
Departments > Management
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 11 Jan 2010 09:50
URL: http://eprints.lse.ac.uk/26556/

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