Faber comments on Is risk aversion really irrational ? - Less Wrong

41 Post author: kilobug 31 January 2012 08:34PM

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Comment author: Vaniver 01 February 2012 12:34:35AM 2 points [-]

But if you adjust the bets for the utility, then, if you're a perfect utilitarian, you should chose the highest expectancy, regardless of the risk involved. Between being sure of getting 10 utilons and having a 0.1 chance of getting 101 utilons (and 0.9 chance to get nothing), you should chose to take the bet. Or you're not rational, says dvasya.

It's not "or you're not rational." It's "or you haven't measured your utility function correctly." If you don't pick the option with higher expected utility, it's not actually utility.

We have a limited power for making computation. The first problem of taking a risk is that it'll make all further computations much harder.

So put that in your utility function. The certainty effect is not always a bias.

Comment author: Faber 01 February 2012 02:31:50PM 2 points [-]

If you don't pick the option with higher expected utility, it's not actually utility.

The point is that we may have utility functions where u(p1A+p2B) != p1u(A)+p2u(B). That is, the utility of a bet may not be equal to the expected value of the utility of the outcomes.

Comment author: Vaniver 01 February 2012 04:46:01PM 1 point [-]

The point is that we may have utility functions where u(p1A+p2B) != p1u(A)+p2u(B).

I am well aware. That's only the case for linear, i.e. 'risk neutral', utility functions.

The thing is, utility is defined as the thing you are risk neutral with respect to. If you're not risk neutral with respect to it, then it's not utility.

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