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Rabin's paradox for health outcomes
Stefan A Lipman1, Arthur E Attema1
1Erasmus School of Health Policy and Management, Erasmus University Rotterdam, Rotterdam, The Netherlands.
Health Economics
|June 21, 2019
Summary
This study directly tested Rabin's paradox (RP) in health economics, finding that expected utility maximization assumptions lead to unrealistic risk aversion. Alternative models like prospect theory better explain individual preferences and health economic decisions.
Area of Science:
- Health Economics
- Behavioral Economics
- Decision Theory
Background:
- Health economic models often assume expected utility maximization with concave utility functions for risk aversion.
- Rabin's paradox (RP) highlights potential inconsistencies in expected utility theory, suggesting extreme risk aversion when evaluating mixed gambles.
- Previous research on RP has been largely theoretical, with limited empirical testing within individual preferences, especially in the health domain.
Purpose of the Study:
- To empirically test Rabin's paradox (RP) within the health domain.
- To investigate the implications of RP for health economic modeling and decision-making.
- To evaluate the suitability of alternative models, such as prospect theory, in explaining health-related preferences.
Main Methods:
- Direct experimental testing of Rabin's paradox preferences in the health context.
- Analysis of individual decision-making when faced with mixed gambles involving health outcomes.
- Comparison of empirical findings with predictions from expected utility theory and prospect theory.
Main Results:
- The study provides direct empirical evidence of Rabin's paradox in individual health preferences.
- Observed preferences in the health domain are inconsistent with the assumptions of expected utility maximization, implying excessive risk aversion.
- Findings support the need for alternative behavioral models in health economics.
Conclusions:
- Expected utility maximization is insufficient to capture realistic risk preferences in health economics.
- Prospect theory, incorporating reference-dependence and loss aversion, offers a more empirically valid framework for health economic decisions.
- The study advocates for a shift towards empirically grounded models in health economic research and policy.
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