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Too Risk-Averse for Prospect Theory?

In: Cultural Finance A World Map of Risk, Time and Money

Author

Listed:
  • Marc Oliver Rieger
  • Thuy Bui

Abstract

We observe that the standard variant of Prospect Theory cannot describe very risk-averse choices in simple lotteries. This makes it difficult to accommodate it with experimental data. Using an exponential value function can solve this problem and allows to cover the whole spectrum of risk-averse behavior. Further evidence in favor of the exponential value function comes from the evaluation of data from a large scale survey on preferences over lotteries where the exponential value function produces the best fits. The results enhance the understanding on what types of lotteries pose potential problems for the classical value function.

Suggested Citation

  • Marc Oliver Rieger & Thuy Bui, 2020. "Too Risk-Averse for Prospect Theory?," World Scientific Book Chapters, in: Cultural Finance A World Map of Risk, Time and Money, chapter 9, pages 201-220, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811221958_0009
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    More about this item

    Keywords

    Finance; Culture; International; Time Preferences; Risk Preferences; Decision Theory;
    All these keywords.

    JEL classification:

    • Z1 - Other Special Topics - - Cultural Economics
    • G4 - Financial Economics - - Behavioral Finance
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics

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