Limitations
The notion of (constant) risk aversion has come under criticism from behavioral economics. According to Matthew Rabin of UC Berkeley, a consumer who,
from any initial wealth level turns down gambles where he loses $100 or gains $110, each with 50% probability will turn down 50-50 bets of losing $1,000 or gaining any sum of money.
It is noteworthy that Rabin's article went on to criticize the whole field of expected utility and not just constant relative risk aversion. This has led to some confusion in the field. One solution to the problem observed by Rabin is that proposed by prospect theory and cumulative prospect theory, where outcomes are considered relative to a reference point (usually the status quo), rather than to consider only the final wealth.
Read more about this topic: Risk Aversion
Famous quotes containing the word limitations:
“Much of what contrives to create critical moments in parenting stems from a fundamental misunderstanding as to what the child is capable of at any given age. If a parent misjudges a child’s limitations as well as his own abilities, the potential exists for unreasonable expectations, frustration, disappointment and an unrealistic belief that what the child really needs is to be punished.”
—Lawrence Balter (20th century)
“... art transcends its limitations only by staying within them.”
—Flannery O’Connor (1925–1964)
“The motion picture made in Hollywood, if it is to create art at all, must do so within such strangling limitations of subject and treatment that it is a blind wonder it ever achieves any distinction beyond the purely mechanical slickness of a glass and chromium bathroom.”
—Raymond Chandler (1888–1959)