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Probabilistic Risk Attitudes and Local Risk Aversion: a Paradox
Sadiraj, Vjollca
Sadiraj, Vjollca
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Abstract
Prominent theories of decision under risk that challenge expected utility theory model risk attitudes at least partly with transformation of probabilities. This paper shows how attributing local risk aversion (partly or wholly) to attitudes towards probabilities can produce extreme probability distortions that imply paradoxical risk aversion.
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To learn more about the Andrew Young School of Policy Studies and ExCEN Working Papers Series, visit https://aysps.gsu.edu/ and http://excen.gsu.edu/center/.
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2012-07-01
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Keywords
Risk aversion, probability transformation, calibration
