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

Details

Serval ID
serval:BIB_53521C1D9477
Type
Article: article from journal or magazin.
Collection
Publications
Title
Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size
Journal
Journal of Risk and Uncertainty
Author(s)
Fehr-Duda H., Bruhin A., Epper T., Schubert R.
ISSN
0895-5646
Publication state
Published
Issued date
04/2010
Peer-reviewed
Oui
Volume
40
Number
2
Pages
147-180
Language
english
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 the observed increase in relative risk aversion over gains cannot be captured by the curvature of the value function. Rather, it is predominantly driven by a change in probability weighting of a majority group of individuals who weight probabilities of high gains more conservatively. Contrary to gains, no coherent change in relative risk aversion is observed for losses. These results not only challenge expected utility theory, but also prospect theory.
Keywords
stake effects, prospect theory, expected utility theory, risk aversion
Web of science
Create date
10/09/2012 10:05
Last modification date
20/08/2019 14:08
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