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SUMMARY:Risk aversion and the long run - Johanna Thoma (LSE)
DTSTART:20161026T120000Z
DTEND:20161026T133000Z
UID:TALK68133@talks.cam.ac.uk
CONTACT:31287
DESCRIPTION:According to the dominant theory of rational choice in the fac
 e of risk \nand uncertainty\, rationality demands that agents maximise exp
 ected \nutility. Critics argue\, however\, that this theory is not suffici
 ently \npermissive of attitudes to risk that are both common\, and seem \n
 intuitively rational. The problem\, according to Buchak (2013)\, is that \
 nfor an agent to be risk averse with regard to a single good such as \nmon
 ey\, the utility function needs to display decreasing marginal utility \nw
 ith regard to that good. If the utility function is to capture the way \ni
 n which the agent values the good\, this means that the good has to be \nw
 orth less to the agent\, the more she has of it. However\, intuitively it 
 \ndoes not seem to be irrational to value a good in a linear way\, and \nn
 evertheless be risk averse with regard to it. We often seem to display \nr
 isk aversion because we want to avoid risk\, not because we do not value \
 nthe goods in question in a linear way. Expected utility theory does not \
 nallow for such an independent role for risk.\n\nSeveral alternatives to e
 xpected utility theory\, notably Buchak’s own \nrisk-weighted expected u
 tility (REU) theory\, which builds on Quiggin’s \n(1982) rank dependent 
 utility theory\, allow for risk to matter \nindependently from the shape o
 f the utility function. This paper poses a \nchallenge to such theories as
  normative theories of rational choice. I \nargue that theories like Bucha
 k’s can only make sense of examples of \nordinary risk aversion if the a
 gents in question framed their decision \nproblems too narrowly\, and thus
  displayed a kind of practical \nirrationality. Once an agent takes accoun
 t of the fact that any risky \nchoice is only one in a long series of risk
 y choices in her life\, these \nalternatives can no longer account for ord
 inary cases of risk aversion. \nBut since these are the very examples that
  motivate these theories in \nthe first place\, they lose much of their ap
 peal as normative theories of \nrational choice.
LOCATION:Seminar Room 2\, Department of History and Philosophy of Science
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