Is risk aversion irrational? Examining the “fallacy” of large numbers

Publication year: 2018

Stefánsson, H. Orri

Synthese, doi.org/10.1007/s11229-018-01929-5

Abstract

A moderately risk averse person may turn down a 50/50 gamble that either results in her winning $200 or losing $100. Such behaviour seems rational if, for instance, the pain of losing $100 is felt more strongly than the joy of winning $200. The aim of this paper is to examine an influential argument that some have interpreted as showing that such moderate risk aversion is irrational. After presenting an axiomatic argument that I take to be the strongest case for the claim that moderate risk aversion is irrational, I show that it essentially depends on an assumption that those who think that risk aversion can be rational should be skeptical of. Hence, I conclude that risk aversion need not be irrational.

Read more about the article: Is risk aversion irrational?
 

Publication year: 2018

Stefánsson, H. Orri ,

Synthese, doi.org/10.1007/s11229-018-01929-5

Abstract

A moderately risk averse person may turn down a 50/50 gamble that either results in her winning $200 or losing $100. Such behaviour seems rational if, for instance, the pain of losing $100 is felt more strongly than the joy of winning $200. The aim of this paper is to examine an influential argument that some have interpreted as showing that such moderate risk aversion is irrational. After presenting an axiomatic argument that I take to be the strongest case for the claim that moderate risk aversion is irrational, I show that it essentially depends on an assumption that those who think that risk aversion can be rational should be skeptical of. Hence, I conclude that risk aversion need not be irrational.

Read more about the article: Is risk aversion irrational?