ECON 310 Lecture 4: winter 2019

• School: McGill University
• Department: Economics
• Course: ECON 310
• Professor: Jian L I

Document Summary

Last lecture: reference-dependent preferences: the evaluations of economic outcomes depend partly on comparisons to relevant reference points. Risk aversion simply means that the utility function is concave. Risk-loving means that the utility function is convex. Most people reject small and moderate-sized favorable gambles such as a 50/50 chance of winning or losing . ** this is such an intuitely obvious fact that until recently, researchers have not even carefully checked it. Barberis, huang, and thaler (2006): they offered the gamble for real (!) to mba students, financial analysts, and very rich investors (with financial wealth of million on average). Most people, including 71% of the investors, turn down the gamble. Based on the expected-utility function, rich people wouldn"t gamble because over their like-time earnings, there is a diminishing marginal utility over wealth. In other words, more or less over the money they have received during their entire life isn"t worth gambling.