Re: Risk aversion=Diminishing marginal utility?

From: Robin Hanson (
Date: Thu Nov 02 2000 - 09:09:42 MST

Nick Bostrom wrote:
>I would prefer a 100% chance of getting $1,000,000 to a 50% of getting
>2,001,000. This could be explained either by saying that I am risk averse
>or by saying that there is a diminishing marginal utility of money for me.
>Is there a way of distinguishing these explanations or are they
>fundamentally saying the same thing?

Under expected utility maximization, they are fundamentally the same thing.
This is a very standard result.

>We might try to answer this question by considering goods that purportedly
>don't have a diminishing marginal utility, such as units of pleasure.
>Suppose I prefer a 100% chance of getting 1,000,000 hedons to a 50% of
>getting 2,001,000 hedons.

Then hedons must have non-linear utility, given expected utility.

>Risk aversion, on the other hand, is not supposed to be relative to goods.

But risk aversion is, and is supposed to be, relative to goods!

Robin Hanson
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030-4444
703-993-2326 FAX: 703-993-2323

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