Adam Smith Business School

Dr Larbi Alaoui, Pompeu Fabra University

"What's in a u" (joint with Antonio Penta)
Tuesday, 29 April 2025. 16:00-17:30
Room 141A, Adam Smith Business School

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.

Bio

I’m an associate professor at Pompeu Fabra University and an affiliated professor at the Barcelona School of Economics. My main fields of research are microeconomic theory, decision theory, behavioural economics and game theory.

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First published: 12 March 2025