Further Reflections on Prospect Theory
AbstractThis paper reports a new experimental test of prospect theoryÃ¢??s reflection effect. We conduct a sequence of experiments that allow us to directly compare choices under reflected gains and losses where real and hypothetical payoffs range from several dollars to over $100. Lotteries with positive payoffs are transformed into lotteries over losses by reflecting all payoffs around zero. When we use hypothetical payments, more than half of the subjects who are risk averse for gains turn out to be risk seeking for losses. This "reflection effect" is diminished considerably with cash payoffs, where the modal choice pattern is to exhibit risk aversion for both gains and losses. However, we do observe a significant difference in risk attitudes between losses (where most subjects are approximately risk neutral) and gains (where most subjects are risk averse). Reflection rates are further reduced when payoffs are scaled up by a factor of 15 (for both real and hypothetical payoffs).
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Bibliographic InfoPaper provided by Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University in its series Experimental Economics Center Working Paper Series with number 2006-23.
Date of creation: Feb 2005
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