Risk aversion (in reality) does not boil down to a concave utility function.

See, e.g., this paper: there are theorems saying e.g. that if your utility function is concave enough to make you turn down a bet where you win $110 or lose $100 with equal probability, it must also be concave enough to make you turn down a bet where you win a trillion dollars or lose $1k with equal probability.

if your utility function is concave enough to make you turn down a bet where you win $110 or lose $100 with equal probability

...at any wealth level, which should be surprising. If Bill Gates thinks that gamble is an expected utility loss, we predict he'll be opposed to basically any gamble, but why would we believe the premise that Bill Gates thinks that gamble is an expected utility loss?

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

by MrMind 1 min read18th Apr 2016176 comments

2


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