Background Risk and Small-Stakes Risk Aversion
Background Risk and Small-Stakes Risk Aversion
Building on Pomatto, Strack, and Tamuz (2020), we identify a tight condition for when background risk can induce first-order stochastic dominance. Using this condition, we show that under plausible levels of background risk, no theory of choice under risk can simultaneously satisfy the following three economic postulates: (i) decision-makers are …