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A parametric analysis of prospect theory’s functionals for the general population

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  • Adam Booij

    ()

  • Bernard Praag
  • Gijs Kuilen

Abstract

This paper presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss aversion coefficient of 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighing functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. Unlike previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response towards the probability of obtaining the best possible outcome.

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Bibliographic Info

Article provided by Springer in its journal Theory and Decision.

Volume (Year): 68 (2010)
Issue (Month): 1 (February)
Pages: 115-148

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Handle: RePEc:kap:theord:v:68:y:2010:i:1:p:115-148

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Web page: http://www.springerlink.com/link.asp?id=100341

Related research

Keywords: Prospect theory; Utility for gains and losses; Loss aversion; Subjective probability weighting;

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Cited by:
  1. Jose-Luis Pinto-Prades & Jose-Maria Abellan-Perpiñan, 2012. "When normative and descriptive diverge: how to bridge the difference," Social Choice and Welfare, Springer, vol. 38(4), pages 569-584, April.
  2. Lefèbvre, Mathieu & Vieider, Ferdinand M. & Villeval, Marie Claire, 2009. "The Ratio Bias Phenomenon: Fact or Artifact?," IZA Discussion Papers 4546, Institute for the Study of Labor (IZA).
  3. Lefebvre, Mathieu & Vieider, Ferdinand M., 2011. "Risk Taking of Executives under Different Incentive Contracts: Experimental Evidence," Discussion Papers in Economics 12210, University of Munich, Department of Economics.
  4. Arthur E. Attema & Werner B.F. Brouwer & Olivier L'Haridon, 2013. "Prospect theory in the health domain: A quantitative assessment," Post-Print halshs-00866788, HAL.
  5. Pahlke, Julius & Strasser, Sebastian & Vieider, Ferdinand M., 2012. "Risk-taking for others under accountability," Economics Letters, Elsevier, vol. 114(1), pages 102-105.
  6. Erner, Carsten & Klos, Alexander & Langer, Thomas, 2013. "Can prospect theory be used to predict an investor’s willingness to pay?," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1960-1973.
  7. James Andreoni & Charles Sprenger, 2011. "Uncertainty Equivalents: Testing the Limits of the Independence Axiom," NBER Working Papers 17342, National Bureau of Economic Research, Inc.
  8. Markus Jäntti & Ravi Kanbur & Milla Nyyssölä & Jukka Pirttilä, 2013. "Poverty and Welfare Measurement on the Basis of Prospect Theory," CESifo Working Paper Series 4095, CESifo Group Munich.
  9. Pahlke, Julius & Strasser, Sebastian & Vieider, Ferdinand M., 2010. "Responsibility Effects in Decision Making under Risk," Discussion Papers in Economics 12115, University of Munich, Department of Economics.

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