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Journal of Economic Perspectives: Vol. 15 No. 1 (Winter 2001)

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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

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.

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Authors

Rabin, Matthew (U CA, Berkeley)
Thaler, Richard H. (U Chicago)

JEL Classifications

D81: Criteria for Decision-Making under Risk and Uncertainty

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