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Type	Working Paper
Scope	Discipline-based scholarship
Title	Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size
Organization Unit	Microeconomics and Experimental Economic Research (Ernst Fehr) Financial Economics (Helga Fehr-Duda)
Authors	Helga Fehr-Duda Adrian Bruhin Thomas Epper Renate Schubert
Language	English
Institution	University of Zurich
Series Name	Working paper series / Institute for Empirical Research in Economics
Number	No. 413
ISSN	1424-0459
Date	2009
Abstract Text	How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that the increase in relative risk aversion over gains cannot be captured by the curvature of the utility function. It is driven predominantly by a change in probability weighting of a majority group of individuals who exhibit more rational probability weighting at high stakes. Contrary to gains, noncoherent change in relative risk aversion is observed for losses. These results not onlynchallenge expected utility theory, but also prospect theory.
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