That paper has shown up here before, and I still don’t like it.
Basically, the way that he presents his ‘aversion’ criterion may sound innocuous but it has really pernicious implications. Rabin thinks the pernicious implications means he’s poked a hole in risk aversion- but instead he’s just identified an incredibly terrible way to elicit aversion parameters. If any decision analyst was told by their client tell them that they’d turn down a −100/+105 bet with $345,000 in the bank, they’d start a long talk designed to make the client comfortable with the mathematics of decision-making under uncertainty, not take that as a reflectively endorsed preference.
Put another way, I don’t think that Neville as stated actually exists (or is sane if he does exist). He might express those preferences under the framing of {.5 −50; .5 +55}, but I don’t think he would reflectively endorse them under the framing of {.5 14950, .5 15055}, and real bets may be difficult to separate from emotional or status effects that invalidate the idea of preferences only being a function of wealth level rather than wealth history (which is a very different sort of aversion than utility functions that are concave in money).
Like you say in the conclusion, prospect theory is a better attempt to understand descriptive decision-making, but concave utility functions are a useful prescriptive tool.
That paper has shown up here before, and I still don’t like it.
Basically, the way that he presents his ‘aversion’ criterion may sound innocuous but it has really pernicious implications. Rabin thinks the pernicious implications means he’s poked a hole in risk aversion- but instead he’s just identified an incredibly terrible way to elicit aversion parameters. If any decision analyst was told by their client tell them that they’d turn down a −100/+105 bet with $345,000 in the bank, they’d start a long talk designed to make the client comfortable with the mathematics of decision-making under uncertainty, not take that as a reflectively endorsed preference.
Put another way, I don’t think that Neville as stated actually exists (or is sane if he does exist). He might express those preferences under the framing of {.5 −50; .5 +55}, but I don’t think he would reflectively endorse them under the framing of {.5 14950, .5 15055}, and real bets may be difficult to separate from emotional or status effects that invalidate the idea of preferences only being a function of wealth level rather than wealth history (which is a very different sort of aversion than utility functions that are concave in money).
Like you say in the conclusion, prospect theory is a better attempt to understand descriptive decision-making, but concave utility functions are a useful prescriptive tool.