Rubinstein2005-page129

Rubinstein2005-page129 - real life agents utility...

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October 21, 2005 12:18 master Sheet number 127 Page number 111 Risk Aversion 111 tation of expected utility theory. Rabin’s argument relies on the doctrine of consequentialism, which is not a part of expected utility theory. Expected utility theory is invariant to the interpretation of the prizes. Independently of the theory of decision making under uncertainty that we use, the set of prizes should be the set of con- sequences in the mind of the decision maker. Thus, it is equally reasonable to assume the consequences are “wealth changes” or “F- nal wealth levels.” I treat Rabin’s argument as further evidence of the empirically problematic nature of the doctrine of consequentialism according to which the decision maker makes all decisions having in mind a preference relation over the same set of Fnal consequences. It also demonstrates how carefully we should tread when trying to estimate
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Unformatted text preview: real life agents utility functions. The practice of estimating an eco-nomic agents risk aversion parameters for small lotteries might lead to misleading conclusions if such estimates are used to characterize the decision makers preferences regarding lotteries over large sums. Bibliographic Notes Recommended readings : Kreps 1990, 8198; Mas-Colell et al. 1995, Chapter 6, CD. 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). Rabins argument is based on Rabin (2000)....
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This note was uploaded on 12/29/2011 for the course ECO 443 taught by Professor Aswa during the Fall '10 term at SUNY Stony Brook.

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