Header

UZH-Logo

Maintenance Infos

Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size


Fehr-Duda, Helga; Bruhin, Adrian; Epper, Thomas; Schubert, Renate (2008). Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size. Working paper series / Socioeconomic Institute No. 708, University of Zurich.

Abstract

How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that, contrary to gains, no coherent change in relative risk aversion is observed for losses. The increase in relative risk aversion over gains cannot be captured by the curvature of the utility function. It is driven predominantly by a change in probability weighting of a majority group of individuals who exhibit more rational probability weighting at high stakes. These results not only challenge expected utility theory, but also prospect theory.

Abstract

How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that, contrary to gains, no coherent change in relative risk aversion is observed for losses. The increase in relative risk aversion over gains cannot be captured by the curvature of the utility function. It is driven predominantly by a change in probability weighting of a majority group of individuals who exhibit more rational probability weighting at high stakes. These results not only challenge expected utility theory, but also prospect theory.

Statistics

Downloads

94 downloads since deposited on 29 Nov 2011
13 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Socioeconomic Institute (former)
Dewey Decimal Classification:330 Economics
JEL Classification:D81, C91
Language:English
Date:February 2008
Deposited On:29 Nov 2011 22:47
Last Modified:12 Aug 2017 13:07
Series Name:Working paper series / Socioeconomic Institute
Official URL:http://www.econ.uzh.ch/wp.html

Download

Download PDF  'Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size '.
Preview
Filetype: PDF
Size: 407kB