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Health Econ. 2019 Aug;28(8):1064-1071. doi: 10.1002/hec.3918. Epub 2019 Jun 19.

Rabin's paradox for health outcomes.

Author information

1
Erasmus School of Health Policy and Management, Erasmus University Rotterdam, Rotterdam, The Netherlands.

Abstract

Many health economic studies assume expected utility maximisation, with typically a concave utility function to capture risk aversion. Given these assumptions, Rabin's paradox (RP) involves preferences over mixed gambles yielding moderate outcomes, where turning down such gambles imply absurd levels of risk aversion. Although RP is considered a classic critique of expected utility, no paper has as of yet fully tested its preferences within individuals. In an experiment we report a direct test of RP in the health domain, which was previously only considered in the economic literature, showing it may have pervasive implications here too. Our paper supports the shift towards alternative, empirically valid models, such as prospect theory, also in the health domain. These alternative models are able to accommodate Rabin's paradox by allowing reference-dependence and loss aversion.

KEYWORDS:

Rabin's paradox; expected utility; loss aversion; reference dependence; risk aversion

PMID:
31218778
DOI:
10.1002/hec.3918

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