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Understanding the Two Components of Risk Attitudes: An Experimental Analysis

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Author Info

  • Jianying Qiu

    ()
    (Department of Finance, University of Vienna, 1210 Vienna, Austria)

  • Eva-Maria Steiger

    ()
    (Strategic Interaction Group, Max Planck Institute of Economics, 07745 Jena, Germany)

Abstract

Cumulative prospect theory introduced the weighting of probabilities as an additional component to capture risk attitudes. However, this addition would be a less significant challenge to expected utility theory (EU) if utility curvature and probability weighting showed strong positive correlation. In that case the utility curvature in EU alone, although not properly describing risky behavior in general, would still capture most of the variance of individual risk aversion. This study provides experimental evidence that such a strong and positive correlation does not exist. Although most individuals exhibit concave utility and convex probability weighting, the two components show no strong positive correlation. This paper was accepted by Peter Wakker, decision analysis.

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File URL: http://dx.doi.org/10.1287/mnsc.1100.1260
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 57 (2011)
Issue (Month): 1 (January)
Pages: 193-199

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Handle: RePEc:inm:ormnsc:v:57:y:2011:i:1:p:193-199

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Related research

Keywords: risk attitude; cumulative prospect theory; experimental study;

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References

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  1. Kuilen, G. van de & Wakker, P.P., 2011. "The midweight method to measure attitudes towards risk and ambiguity," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4275073, Tilburg University.
  2. Gijs Kuilen, 2009. "Subjective Probability Weighting and the Discovered Preference Hypothesis," Theory and Decision, Springer, vol. 67(1), pages 1-22, July.
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Cited by:
  1. Qiu, Jianying & Weitzel, Utz, 2013. "Experimental Evidence on Valuation and Learning with Multiple Priors," MPRA Paper 43974, University Library of Munich, Germany.
  2. Gijs van de Kuilen & Peter P. Wakker, 2011. "The Midweight Method to Measure Attitudes Toward Risk and Ambiguity," Management Science, INFORMS, vol. 57(3), pages 582-598, March.

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