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Resolving Rabin’s paradox |
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| Authors: | Bleichrodt Han Doctor Jason N Gao Yu Li Chen Meeker Daniella Wakker Peter P |
| Institution: | 1.Erasmus School of Economics, Erasmus University Rotterdam, 3000, Rotterdam, DR, the Netherlands ;2.Research School of Economics, Australian National University, ACT, Canberra, 2601, Australia ;3.Sol Price School of Public Policy, University of Southern California, Los Angeles, CA, 90033, USA ;4.Department of Applied Economics, Guanghua School of Management, Peking University, Yiheyuan Road No. 5, Beijing, 100871, China ;5.Keck School Medicine, University of South California, Los Angeles, CA, 90089, USA ; |
| Abstract: | We present a theoretical model of Rabin’s famous calibration paradox that resolves confusions in the literature and that makes it possible to identify the causes of the paradox. Using suitable experimental stimuli, we show that the paradox truly violates expected utility and that it is caused by reference dependence. Rabin already showed that utility curvature alone cannot explain his paradox. We, more strongly, do not find any contribution of utility curvature to the explanation of the paradox. We find no contribution of probability weighting either. We conclude that Rabin’s paradox underscores the importance of reference dependence. |
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