Risk aversion (in reality) does not boil down to a concave utility function. So the OP's claim that a well-defined utility function will fully determine the optimal risk-reward tradeoff is still false.

By "risk aversion in realty," do you mean "the descriptive thing that people actually do when it comes to risk," or "the prescriptive thing that people should do when it comes to risk"?

Because, sure, it looks like most people do some sort of prospect theory reasoning where they don't use probabilities correctly / have a strong reliance on cached answers and avoiding planning. (This is one of the reasons to think loss aversion is helpful, for example; if you get a windfall you don't need to replan things, but if you suffer a loss you may have to replan things.) But it's not at all obvious that they're making the right call.

By "risk aversion in realty," do you mean "the descriptive thing that people actually do when it comes to risk," or "the prescriptive thing that people should do when it comes to risk"?

Both. I primarily have in mind risk management in finance where what people actually do is much more than compensate for the curve of the utility function; and where people should do what they are doing or they will lose their shirts pretty quickly.

The OP is interested in the prescriptive mode so the simple answer is that dealing with the ris... (read more)

Open thread, Apr. 18 - Apr. 24, 2016

by MrMind 1 min read18th Apr 2016176 comments

2


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