An Empirical Test of Gain-Loss Separability in Prospect Theory
AbstractWe investigate a basic premise of prospect theory: that the valuation of gains and losses is separable. In prospect theory, gain-loss separability implies that a mixed gamble is valued by summing the valuations of the gain and loss portions of that gamble. Two experimental studies demonstrate a systematic violation of the double-matching axiom, an axiom that is necessary for gain-loss separability. We document a reversal between preferences for mixed gambles and the associated gain and loss gambles--mixed gamble A is preferred to mixed gamble B, but the gain and loss portions of B are preferred to the gain and loss portions of A. The observed choice patterns are consistent with a process in which individuals are less sensitive to probability differences when choosing among mixed gambles than when choosing among either gain or loss gambles.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 54 (2008)
Issue (Month): 7 (July)
risky choice; prospect theory; mixed gambles; double matching; probability weighting function;
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