Risk Aversion in Cumulative Prospect Theory
AbstractThis paper characterizes the conditions for strong risk aversion and second-order stochastic dominance for cumulative prospect theory. Strong risk aversion implies a convex weighting function for gains and a concave one for losses. It does not necessarily imply a concave utility function. The latter does follow if the weighting functions are continuous. By investigating the exact relationship between loss aversion and strong risk aversion, a natural index for the degree of loss aversion is derived.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 54 (2008)
Issue (Month): 1 (January)
cumulative prospect theory; loss aversion; risk aversion; second-order stochastic dominance; decision analysis theory; risk;
Other versions of this item:
- U Schmidt & H Zank, 2002. "Risk Aversion in Cumulative Prospect Theory," The School of Economics Discussion Paper Series 0207, Economics, The University of Manchester.
- Schmidt, Ulrich & Horst Zank, 2002. "Risk Aversion in Cumulative Prospect Theory," Royal Economic Society Annual Conference 2002 162, Royal Economic Society.
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- Maier, Johannes & Rüger, Maximilian, 2010. "Measuring Risk Aversion Model-Independently," Discussion Papers in Economics 11873, University of Munich, Department of Economics.
- Botzen, W.J.W. & van den Bergh, J.C.J.M., 2012. "Risk attitudes to low-probability climate change risks: WTP for flood insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 151-166.
- Ulrich Schmidt & Horst Zank, 2005.
"What is Loss Aversion?,"
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- Ryan, Matthew J., 2006. "Risk aversion in RDEU," Journal of Mathematical Economics, Elsevier, vol. 42(6), pages 675-697, September.
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