Last Uncertainty Wednesday, we saw how diminishing marginal utility of wealth provides an explanation of risk aversion via Jensen’s inequality. Why would it be then that lots of people seem to like small gambles, like a game of poker among friends. One possible explanation is that the utility function is locally convex around your current endowment. So this would look something like the following:In the immediate area around the endowment (marked with dotted lines for two different levels) th...

Last Uncertainty Wednesday, we saw how diminishing marginal utility of wealth provides an explanation of risk aversion via Jensen’s inequality. Why would it be then that lots of people seem to like small gambles, like a game of poker among friends. One possible explanation is that the utility function is locally convex around your current endowment. So this would look something like the following:In the immediate area around the endowment (marked with dotted lines for two different levels) th...