Background risk and small-stakes risk aversion
Theoretical Economics
2021-03-09 v2
Abstract
We show that under plausible levels of background risk, no theory of choice under risk -- such as expected utility theory, prospect theory, or rank dependent utility -- can simultaneously satisfy the following three economic postulates: (i) Decision makers are risk-averse over small gambles, (ii) they respect stochastic dominance, and (iii) they account for background risk.
Cite
@article{arxiv.2010.08033,
title = {Background risk and small-stakes risk aversion},
author = {Xiaosheng Mu and Luciano Pomatto and Philipp Strack and Omer Tamuz},
journal= {arXiv preprint arXiv:2010.08033},
year = {2021}
}