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Probabilistic Risk Attitudes and Local Risk Aversion: a Paradox

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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Date
2012-07-01
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Research Projects
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Keywords
Risk aversion, probability transformation, calibration
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