Article: article from journal or magazin.
Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size
Journal of Risk and Uncertainty
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.
stake effects, prospect theory, expected utility theory, risk aversion
Web of science
Last modification date