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Rationality on the rise: Why relative risk aversion increases with stake size

Fehr-Duda, Helga ; Bruhin, Adrian ; Epper, Thomas ; Schubert, Renate

In: Journal of Risk and Uncertainty, 2010, vol. 40, no. 2, p. 147-180

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    Titre
    • Rationality on the rise: Why relative risk aversion increases with stake size
    Auteur
    • Fehr-Duda, Helga. Chair of Economics, ETH Zurich, Weinbergstrasse 35, 8092, Zurich, Switzerland
    • Bruhin, Adrian. Chair of Economics, ETH Zurich, Weinbergstrasse 35, 8092, Zurich, Switzerland
    • Epper, Thomas. Chair of Economics, ETH Zurich, Weinbergstrasse 35, 8092, Zurich, Switzerland
    • Schubert, Renate. Chair of Economics, ETH Zurich, Weinbergstrasse 35, 8092, Zurich, Switzerland
    Type de document
    • Postprint
    Langue
    • Inglese
    Publié dans
    • Journal of Risk and Uncertainty, 2010, vol. 40, no. 2, p. 147-180. Springer US; http://www.springer-ny.com
    Autre version électronique
    Identifiant OAI-PMH
    • oai:doc.rero.ch:321805
    Summary
    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