I think this is dumb (that is, the neglect is dumb; utility functions are smart). Am I right?
Not in the first approximation, because utility is (hopefully) a monotonous function and you would end up in the same spot regardless of whether you're maximizing utility or maximizing wealth.
The participants didn't seem to realize that the right decision depends on the size of the stakes.
Well, the first thing that the decision depends on is the risk aversion and there is no single right one-size-fits-all risk aversion parameter (or a function).
But yes, you are correct in that the size of the bet (say, as % of your total wealth) influences the risk-reward trade-off, though I suspect it's usually rolled into the risk aversion.
Note that the market prices risks on the bet-is-a-tiny-percentage-of-total-wealth basis.
you would end up in the same spot regardless of whether you're maximizing utility or maximizing wealth.
But under conditions of uncertainty, expected utility is not a monotonic function of expected wealth.
Well, the first thing that the decision depends on is the risk aversion and there is no single right one-size-fits-all risk aversion parameter (or a function).
I'll defer to the SSC link on why I think it would be better to make one up--or rather, make up a utility function that incorporates it.
...Note that the market prices risks on the bet-is-a-tin
If it's worth saying, but not worth its own post (even in Discussion), then it goes here.
Notes for future OT posters:
1. Please add the 'open_thread' tag.
2. Check if there is an active Open Thread before posting a new one. (Immediately before; refresh the list-of-threads page before posting.)
3. Open Threads should be posted in Discussion, and not Main.
4. Open Threads should start on Monday, and end on Sunday.