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Background Risk and Small-Stakes Risk Aversion

Mu, Xiaosheng and Pomatto, Luciano and Strack, Philipp and Tamuz, Omer (2020) Background Risk and Small-Stakes Risk Aversion. . (Unpublished)

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We show that under plausible levels of background risk, no theory of choice under risk---such as expected utility theory, prospect theory, or rank dependent utility---can simultaneously satisfy the following three economic postulates: (i) Decision makers are risk-averse over small gambles, (ii) they respect stochastic dominance, and (iii) they account for background risk.

Item Type:Report or Paper (Discussion Paper)
Related URLs:
URLURL TypeDescription Paper
Mu, Xiaosheng0000-0002-2868-5182
Pomatto, Luciano0000-0002-4331-8436
Strack, Philipp0000-0002-7960-9243
Tamuz, Omer0000-0002-0111-0418
Additional Information:We want to thank Ned Augenblick, Nick Barberis, Sebastian Ebert, Armin Falk, Stefano DellaVigna, Paul Heidhues, Matthew Rabin, Todd Sarver, Charlie Sprenger and Juuso Välimäki for helpful comments and discussions. Xiaosheng Mu acknowledges the hospitality of Columbia University and the Cowles Foundation at Yale University, which hosted him during parts of this research. Omer Tamuz was supported by a grant from the Simons Foundation (#419427), by a BSF grant (#2018397) and by a Sloan fellowship.
Funding AgencyGrant Number
Simons Foundation419427
Binational Science Foundation (USA-Israel)2018397
Alfred P. Sloan FoundationUNSPECIFIED
Record Number:CaltechAUTHORS:20210303-154333226
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:108298
Deposited By: Tony Diaz
Deposited On:04 Mar 2021 00:07
Last Modified:02 Jun 2023 01:12

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