Calibration without reduction for non-expected utility (original) (raw)

Journal of Economic Theory, 2015

Abstract

Calibration results in Rabin (2000) and and suggest that both expected and non-expected utility theories cannot produce non-negligible risk aversion over small stakes without producing implausible risk aversion over large stakes. This paper provides calibration results for recursive non-expected utility theories that relax the Reduction of Compound Lotteries axiom (as in Segal, 1990). These calibration results imply that a broad class of non-expected utility theories can accommodate both small and large stakes risk aversion, even for a decision-maker who faces background risk.

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