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A Parametric Analysis of Prospect Theory's Functionals for the General Population

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Author Info
Booij, Adam S. () (University of Amsterdam)
van Praag, Bernard M. S. () (University of Amsterdam)
van de Kuilen, Gijs () (Tilburg University)

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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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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4117.

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Date of creation: Apr 2009
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Handle: RePEc:iza:izadps:dp4117

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Related research
Keywords: loss aversion; utility for gains and losses; prospect theory; subjective probability weighting;

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Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments

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