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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)

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

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

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Length: 45 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4117

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

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Cited by:
  1. 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.
  2. J.ntti, Markus & Kanbur, Ravi & Nyyss.l., Milla & Pirttil., Jukka, 2012. "Poverty and Welfare Measurement on the Basis of Prospect Theory," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  3. 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, Elsevier, vol. 37(6), pages 1960-1973.
  4. Mathieu Lefebvre & Ferdinand Vieider & Marie-Claire Villeval, 2009. "The Ratio Bias Phenomenon : Fact or Artifact ?," Working Papers, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure 0925, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  5. Pahlke, Julius & Strasser, Sebastian & Vieider, Ferdinand M., 2010. "Responsibility Effects in Decision Making under Risk," Discussion Papers in Economics, University of Munich, Department of Economics 12115, University of Munich, Department of Economics.
  6. Lefebvre, Mathieu & Vieider, Ferdinand M., 2011. "Risk Taking of Executives under Different Incentive Contracts: Experimental Evidence," Discussion Papers in Economics, University of Munich, Department of Economics 12210, University of Munich, Department of Economics.
  7. Jose-Luis Pinto-Prades & Jose-Maria Abellan-Perpiñan, 2011. "When normative and descriptive diverge: how to bridge the difference," Working Papers 11.06, Universidad Pablo de Olavide, Department of Economics.
  8. James Andreoni & Charles Sprenger, 2011. "Uncertainty Equivalents: Testing the Limits of the Independence Axiom," NBER Working Papers 17342, National Bureau of Economic Research, Inc.
  9. Pahlke, Julius & Strasser, Sebastian & Vieider, Ferdinand M., 2012. "Risk-taking for others under accountability," Economics Letters, Elsevier, Elsevier, vol. 114(1), pages 102-105.
  10. Alpaslan Akay & Peter Martinsson & Haileselassie Medhin & Stefan Trautmann, 2012. "Attitudes toward uncertainty among the poor: an experiment in rural Ethiopia," Theory and Decision, Springer, Springer, vol. 73(3), pages 453-464, September.

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