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Reflections on gains and losses: A 2 × 2 × 7 experiment

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  • Antoni Bosch-Domènech

    ()

  • Joaquim Silvestre

    ()

Abstract

What determines risk attraction or aversion? We experimentally examine three factors: the gain-loss dichotomy, the probabilities (0.2 vs. 0.8), and the money at risk (7 amounts). We find that the majority display risk attraction for small amounts of money, and risk aversion for larger amounts. Yet the frequency of risk attraction varies according to the gain-loss dichotomy and the probabilities. Kahneman and Tversky studied gain-loss reflections. We submit that a reflection can be decomposed into a translation and a probability switch. We find significant translation and switch effects, which are of comparable magnitude, a result that is equidistant from the diverging two popular views inspired by Prospect Theory: the gain-loss asymmetry, and the fourfold pattern. Copyright Springer Science + Business Media, LLC 2006

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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 33 (2006)
Issue (Month): 3 (December)
Pages: 217-235

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Handle: RePEc:kap:jrisku:v:33:y:2006:i:3:p:217-235

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Web page: http://www.springerlink.com/link.asp?id=100299

Related research

Keywords: Reflection effect; Risk attraction; Risk aversion; Gains; Losses; Experiments; Prospect theory; Fourfold pattern;

References

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  1. Antoni Bosch-Domènech & Joaquim Silvestre, 2005. "The gain-loss asymmetry and single-self preferences," Economics Working Papers 885, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Bosch-Domènech, Antoni & Silvestre, Joaquim, 2010. "Averting risk in the face of large losses: Bernoulli vs. Tversky and Kahneman," Economics Letters, Elsevier, vol. 107(2), pages 180-182, May.
  3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  4. William Harbaugh & Kate Krause & Lise Vesterlund, 2002. "Risk attitudes of children and adults: Choices over small and large probability gains and losses," Artefactual Field Experiments 00055, The Field Experiments Website.
  5. Matthew Rabin, 2001. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Method and Hist of Econ Thought 0012001, EconWPA.
  6. Antoni Bosch-Domènech & Joaquim Silvestre, 2003. "Do the Wealthy Risk More Money? An Experimental Comparison," Discussion Papers 03-15, University of Copenhagen. Department of Economics.
  7. Bosch-Domenech, Antoni & Silvestre, Joaquim, 1999. "Does risk aversion or attraction depend on income? An experiment," Economics Letters, Elsevier, vol. 65(3), pages 265-273, December.
  8. Ignacio Palacios-Huerta & Roberto Serrano & Oscar Volig, 2001. "Rejecting Small Gambles under Expected Utility: a Comment on Rabin," Working Papers 2001-05, Brown University, Department of Economics.
  9. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
  10. William Harbaugh & Kate Krause & Lise Vesterlund, 2002. "Risk Attitudes of Children and Adults: Choices Over Small and Large Probability Gains and Losses," Experimental Economics, Springer, vol. 5(1), pages 53-84, June.
  11. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  12. Antoni Bosch-Domènech & Joaquim Silvestre, 2006. "Risk aversion and embedding bias," Economics Working Papers 934, Department of Economics and Business, Universitat Pompeu Fabra.
  13. Drazen Prelec & George Loewenstein, 1991. "Decision Making Over Time and Under Uncertainty: A Common Approach," Management Science, INFORMS, vol. 37(7), pages 770-786, July.
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Cited by:
  1. Antoni Bosch-Domènech & Joaquim Silvestre, 2013. "Measuring risk aversion with lists: a new bias," Theory and Decision, Springer, vol. 75(4), pages 465-496, October.
  2. De Giorgi, Enrico & Hens, Thorsten, 2005. "Making Prospect Theory Fit for Finance," Discussion Papers 2005/19, Department of Business and Management Science, Norwegian School of Economics.
  3. Malul, Miki & Rosenboim, Mosi & Shavit, Tal, 2013. "So when are you loss averse? Testing the S-shaped function in pricing and allocation tasks," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 101-112.
  4. Koch, Christopher & Schunk, Daniel, 2007. "The Case for Limited Auditor Liability - The Effects of Liability Size on Risk Aversion and Ambiguity Aversion," Sonderforschungsbereich 504 Publications 07-04, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.

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