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Uh, no. Risk aversion is rational. It seems like you're equating rationality with risk neutral preferences, which I, and a lot of other people disagree with.
by cdjk 13y ago
Uh, no. Risk aversion is rational. It seems like you're equating rationality with risk neutral preferences, which I, and a lot of other people disagree with.
Besides, it's all about risk preference. As long as my preferences are consistent and transitive, I think it's safe to say they are rational. Take the fire insurance example. Suppose I have a job that pays $10k/year. I would gladly pay $200/year to avoid the possibility of a $100k loss. Those are my preferences, and as long as you can't a non-transitive loop, it's perfectly rational of me to have those preferences. In this case, I'd value the guaranteed loss of $100 to be a much better outcome than the risk of loss of $100k.
In short, rational != risk neutral.
- gbog 13y agoExcept if your entire wealth is at stake, being risk adverse is not rational. That is the whole point of Thinking Fast and Slow. Proof is easy: I give you the choice to play on the flip of a coin, one side you win $1200 other side you loose $1000. You'll likely refuse because of fear of loss. Then consider I propose the bet 1000 times in a year, under different disguise so you don't recognize it. You lost 200 000! It is not rational to refuse a net positive bet it of irrational fear of loss. It is even more obvious for the lottery, because we would all agree that paying lottery ticket is irrational, right?