Expected utility maximization is an excellent prescriptive decision theory… However, it is completely wrong as a descriptive theory of how humans behave… Matthew Rabin showed why. If people are consistently slightly risk averse on small bets and expected utility theory is approximately correct, then they have to be massively, stupidly risk averse on larger bets, in ways that are clearly unrealistic. Put simply, the small bets behavior forces their utility to become far too concave.
Yeah. See also Stuart’s post:
Damn. I’d searched for if this was on here already, but clearly not well enough.