Can Risk Aversion Survive the Long Run?

Hayden Wilkinson

The Philosophical Quarterly, 2022

Abstract

Can it be rational to be risk-averse? It seems plausible that the answer is yes—that normative decision theory should accommodate risk aversion. But there is a seemingly compelling class of arguments against our most promising methods of doing so. These long-run arguments point out that, in practice, each decision an agent makes is just one in a very long sequence of such decisions. Given this form of dynamic choice situation and the (Strong) Law of Large Numbers, they conclude that those theories which accommodate risk aversion end up delivering the same verdicts as risk-neutral theories in nearly all practical cases. If so, why not just accept a simpler, risk-neutral theory? The resulting practical verdicts seem to be much the same. In this paper, I show that these arguments do not in fact condemn those risk-aversion-accommodating theories. Risk aversion can indeed survive in the long run.

Conclusion

Where does this leave our most promising risk-aversion-accommodating theories? Do they offer no true alternative to expected value theory, as long-run arguments have suggested?

Such theories do offer an alternative. As shown here, they disagree with expected value theory in various classes of cases: Whenever agents compare options with equal expected value and which one is riskier; when any given pair of options are compared by agents who are simply risk-averse enough; when even agents who are only moderately risk-averse face decisions with particularly high stakes; and, if we reject resolute choice, then also when an agent compares options available to them near the end of their life. And these will include moral decisions on which it is especially important for our theory to get right: high-stakes decisions such as, perhaps, a political leader deciding whether to start a war or an elderly philanthropist deciding where to bequeath their riches. It will not do to simply follow the verdicts of expected value theory in these cases if instead some risk-aversion-accommodating theory is true—disagreement even just in these cases is enough to warrant retaining such theories.

Admittedly, it is true that these theories agree with expected value theory in many cases. We now have formal proof of that. Take any decision between two options (with unequal expected value). If an agent has a suitable risk attitude and faces sufficiently many other decisions in their life, then REU theory and EU theory will agree with expected value theory on the verdict.

The article is here.

Not lost in translation: Successfully replicating Prospect Theory in 19 countries

Kai Ruggeri and others
OSF Preprints
Originally posted August 21, 2019

Abstract

Kahneman and Tversky’s 1979 article on Prospect Theory is one of the most influential papers across all of the behavioural sciences. The study tested a series of binary financial (risky) choices, ultimately concluding that judgments formed under uncertainty deviate significantly from those presumed by expected utility theory, which was the prevailing theoretical construct at the time. In the forty years since publication, this study has had a remarkable impact on science, policy, and other real-world applications. At the same time, a number of critiques have been raised about its conclusions and subsequent constructs that were founded on it, such as loss aversion. In an era where such presumed canonical theories have increasingly drawn scrutiny for inability to replicate, we attempted a multinational study of N = 4,099 participants from 19 countries and 13 languages. The same methods and procedures were used as in the original paper, adjusting only currencies to make them relative to current values, and requiring all participants to respond to all items. Overall, we found that results replicated for 94% of the 17 choice items tested. At most, results from the 1979 study were attenuated in our findings, which is most likely due to a more robust sample. Twelve of the 13 theoretical contrasts presented by Kahneman and Tversky also replicated, with a further 89% replication rate of the total contrasts possible when separating by location, up to 100% replication in some countries. We conclude that the principles of Prospect Theory replicate beyond any reasonable thresholds, and provide a number of important insights about replications, attenuation, and implications for the study of human decision-making at population-level.

The research is here.