Does this merely mean that this type of risk-aversion is considered irrational and therefore not covered in the VNM model?
Yes. If you are risk-averse (or loss-averse) in terms of marginal changes in your money, then you’re not optimizing any consistent function of your total amount of money.
Yes. If you are risk-averse (or loss-averse) in terms of marginal changes in your money, then you’re not optimizing any consistent function of your total amount of money.