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Journal of Economic Perspectives: Vol. 15 No. 1 (Winter 2001)
JEP Volume. 15, Issue 1 | 
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Anomalies: Risk Aversion
Article Citation
Rabin, Matthew, and
Richard H. Thaler. 2001. "Anomalies: Risk Aversion."
Journal of Economic Perspectives,
15(1): 219-232.
DOI: 10.1257/jep.15.1.219
DOI: 10.1257/jep.15.1.219
Abstract
Economists ubiquitously employ a simple and elegant explanation for risk aversion: It derives from the concavity of the utility-of-wealth function within the expected-utility framework. We show that this explanation is not plausible in most applications, since anything more than economically negligible risk aversion over moderate stakes requires a utility-of-wealth function that is so concave that it predicts absurdly severe risk aversion over very large stakes. We present examples of how the expected-utility framework has misled economists, and why we believe a better explanation for risk aversion must incorporate loss aversion and mental accounting.
Article Full-Text Access
Full-text Article (Complimentary)
Authors
Rabin, Matthew (U CA, Berkeley)
Thaler, Richard H. (U Chicago)
Thaler, Richard H. (U Chicago)
JEL Classifications
D81: Criteria for Decision-Making under Risk and Uncertainty
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