Unformatted text preview: real life agents’ utility functions. The practice of estimating an eco-nomic agent’s risk aversion parameters for small lotteries might lead to misleading conclusions if such estimates are used to characterize the decision maker’s preferences regarding lotteries over large sums. Bibliographic Notes Recommended readings : Kreps 1990, 81–98; Mas-Colell et al. 1995, Chapter 6, C–D. The measures of risk aversion are taken from Arrow (1970) and Pratt (1964). ±or the psychological literature discussed here, see Kahneman and Tversky (1979) and Kahneman and Tversky (2000). The St. Petersburg Paradox was suggested by Daniel Bernoulli in 1738 (see Bernoulli 1954). The notion of stochastic domination was introduced into the economic literature by Rothschild and Stiglitz (1970). Rabin’s argument is based on Rabin (2000)....
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- Fall '10
- Utility, St. Petersburg paradox, Rabin