Calibration results for rank-dependent expected utility
William S. Neilson
Abstract
Open-access reader
William S. Neilson
Abstract
Open-access reader
If its utility function is everywhere increasing and concave, rank-dependent expected utility shares a troubling property with expected utility aversion to the same moderate-stakes risk at every wealth level implies an extreme aversion to large-stakes risks. In fact, the problem may be even worse for rank-dependent expected utility, since the moderate-stakes risk need not be actuarially fair.
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If its utility function is everywhere increasing and concave, rank-dependent expected utility shares a troubling property with expected utility aversion to the same moderate-stakes risk at every wealth level implies an extreme aversion to large-stakes risks. In fact, the problem may be even worse for rank-dependent expected utility, since the moderate-stakes risk need not be actuarially fair.
Key concepts: Expected utility hypothesis, Risk aversion (psychology), Isoelastic utility, Rank (graph theory), Economics, Econometrics, Calibration, Von Neumann–Morgenstern utility theorem