D81 - Criteria for Decision-Making under Risk and UncertaintyReturn

Although the link between risk aversion and diminishing marginal utility of wealth is academically well established, theoretical discussions concerning its empirical validity remain. The presented, review-type paper aims to briefly examine theoretical roots responsible for the different views on this association in order to provide a broader perspective to alternative explanations. This latter task is assisted by comparative analysis of two recent pieces of research by Rick Falkenstein and Matthew Rabin; a duo of papers, handpicked at the author’s discretion to demonstrate the convergence of alternative ideas from different authors (and backgrounds). In support of its argumentation, the paper also presents a critical overview of the equity premium puzzle as seen through the prism of behavioural finance. The main contributions of the paper include evidence-based support for the concept of relative utility and reconfirmation of the meaningful role of behavioural finance in economics and finance.

The authors of the article point out that the theory of economics has failed to yield a solid theoretical background in such critical situations as the transformational period of post-communist economies and the period of the current financial and economic crisis. While classical liberal or Keynesian concepts are failing, theorists cannot look to mathematical modeling for help. The challenge for today's theoretical economists is to find a new concept for today's global era.