Background Risk and Small-Stakes Risk Aversion
tamuz.caltech.edu · 9,314 words · saved by 1 readers
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Background Risk and Small-Stakes Risk Aversion∗ Xiaosheng Mu† Luciano Pomatto‡ Philipp Strack§ Omer Tamuz¶ March 7, 2021 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…
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