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Learning to be Risk Averse?

Author

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  • Robert E. Marks

    (School of Economics, Australian School of Business, the University of New South Wales)

Abstract

The purpose of this research is to search for the best (highest performing) risk profile of agents who successively choose among risky prospects. An agent’s risk profile is his attitude to perceived risk, which can vary from risk preferring to risk neutral (an expected-value decision maker) to risk averse. We use the Genetic Algorithm to search in the complex stochastic space of repeated lotteries. We find that agents with a CARA utility function learn to possess risk-neutral risk profiles. Since CARA utility functions are wealth-independent, this is not surprising. When agents have wealth-dependent, CRRA utility functions, however, they also learn to possess risk profiles that are about risk neutral (from slightly risk-averse to even slightly risk-preferring), which is surprising.

Suggested Citation

  • Robert E. Marks, 2014. "Learning to be Risk Averse?," Discussion Papers 2014-10, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2014-10
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2014-10.pdf
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    References listed on IDEAS

    as
    1. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    2. Rabin, Matthew, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series qt731230f8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
    4. Arthur, W Brian, 1991. "Designing Economic Agents that Act Like Human Agents: A Behavioral Approach to Bounded Rationality," American Economic Review, American Economic Association, vol. 81(2), pages 353-359, May.
    5. DellaVigna, Stefano & LiCalzi, Marco, 2001. "Learning to make risk neutral choices in a symmetric world," Mathematical Social Sciences, Elsevier, vol. 41(1), pages 19-37, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    risk profile; decision-making under uncertainty; simulation;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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