2 research outputs found
Rabin’s calibration theorem revisited
We simplify and refine the theoretical results behind Rabin’s famous calibration theorem for expected utility preferences and present the resulting tightened versions of his numerical illustrations
Risk Taking with Background Risk under Recursive Rank-Dependent Utility
This paper examines how background risk affects risk taking under rank-dependent utility. I assume that a decision-maker facing a risk taking decision in the presence of background risk views these risks as composing a compound lottery, and recursively evaluates this compound lottery using rank-dependent utility. I show that adding background risk increases risk aversion whenever the utility-for-wealth function is risk vulnerable (Gollier and Pratt, 1996) in this model.