Who’s Afraid of a Little Risk? New Evidence for General Risk Aversion

Abstract

Triggered by the seminal work of Ward Edwards in the 1950s, the assumption of rationality in decision making as defined in the rational expectations model embraced by economics and other social sciences has come under scrutiny over the last fourty years. Closer inspection has frequently found it lacking in descriptive accuracy. As Edwards pointed out as early as 1954, ``it is easy for a psychologist to [show] that an economic man…is very unlike a real man'' (p. 382). The general public tends to agree and has not been surprised by the failure of this type of rationality to explain behavior. Thus the novelist Smiley (1995) has one of her characters describe a microeconomics lecture on the topic as ``rollicking tales about an entirely alien planet, the Bizarro Planet, home of Bizarro Superman'' (p. 141).