What's in a u? by Dr Larbi Alaoui (Pompeu Fabra University)

What's in a u?

Dr Larbi Alaoui, joint with Dr Antonio Penta

Abstract

We revisit the long-lasting debate about the meaning of the utility function used in the standard Expected Utility (EU) model. Despite the common view that EU forces risk aversion and diminishing marginal utility of wealth to be pegged to one another, here we show that this is not the case. Diminishing marginal utility for money is a reason for risk-aversion, but it need not suffice for it, nor need it be its sole determinant. The attitude towards ‘pure risk’ is also a contributing factor, and it is independent from the former. They can be separately identified, and they both concur to the overall attitude towards risk. We discuss several implications of this result, including: (i) questions of identification; (ii) a new perspective on the implications of Rabin’s Paradox; (iii) empirical measures of risk via self-reported questionnaires and in multi-context settings.

About the speaker

Dr Larbi Alaoui is an associate (tenured) professor at Pompeu Fabra University, an associate research professor at the Barcelona School of Economics, and a Ramon y Cajal researcher. His main fields of research are microeconomic theory, decision theory, behavioral economics and media economics.