Rabin's calibration theorem, proved by Matthew Rabin in 2000 and also known as Rabin's paradox or Rabin's critique, is a result in microeconomics and decision theory showing that an expected-utility maximizer who is only moderately risk averse over small stakes must, under the classical model of diminishing marginal utility, be implausibly risk averse over large stakes. The result is presented as a critique of using expected-utility theory with concave utility of money to explain everyday risk aversion, and it has since been extended to a range of non-expected-utility models of choice under uncertainty.
Facts
StatementAn expected-utility maximizer who is moderately risk averse over small-stake gambles across a range of wealth levels must show implausibly high risk aversion over high stakes. 1 Sources
1. Rabin's calibration theorem - Wikipedia
Introduction, paragraph 1, sentence 2
must show implausibly high risk aversion over high stakes.
Introduction, paragraph 3, sentence 1
The result was first shown by Matthew Rabin in 2000.
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