Thank you! I’ve heard this argument vaguely alluded to before, so I’m very happy to see a post about it. I’m still not sure what I think about it, though, because decreasing marginal utility felt like it was the only good reason to be risk averse. So how am I supposed to model myself now?
If decreasing marginal utility is the only good reason to be risk averse but you’re more risk averse than it can justify, then you should (1) model yourself in some empirical way that gives a reasonable description of your behaviours (you probably have such a model already, albeit implicit) and (2) try to be less risk averse.
Real people are risk averse not only because of decreasing marginal utility, but also because they see “I had the choice to refuse a bet but did not take that choice, and consequently I lost money through my own choice,” as an additional bad thing distinct from losing money.
Thank you! I’ve heard this argument vaguely alluded to before, so I’m very happy to see a post about it. I’m still not sure what I think about it, though, because decreasing marginal utility felt like it was the only good reason to be risk averse. So how am I supposed to model myself now?
If decreasing marginal utility is the only good reason to be risk averse but you’re more risk averse than it can justify, then you should (1) model yourself in some empirical way that gives a reasonable description of your behaviours (you probably have such a model already, albeit implicit) and (2) try to be less risk averse.
Real people are risk averse not only because of decreasing marginal utility, but also because they see “I had the choice to refuse a bet but did not take that choice, and consequently I lost money through my own choice,” as an additional bad thing distinct from losing money.