Relating the two Dimensions of Risk Attitudes: An Experimental Analysis
AbstractIn the framework of expected utility theory, risk attitudes are entirely captured by the curvature of the utility function. In cumulative prospect theory (CPT) risk attitudes have an additional dimension: the weighting of probabilities. With this modification, one question arises naturally: since both utility and probability weighting determine the attitude towards risk, what is the relation between them? We ran a controlled laboratory experiment to answer this question. Our ï¬ndings suggest that the two dimensions capture diï¬€erent characteristics of individual risk attitude. Though individuals who are risk averse in one dimension are likely to be risk averse in the other, the two dimensions show no signiï¬cant correlation. Moreover, a signiï¬cant proportion of subjects are risk averse in one dimension but risk seeking in the other.
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Bibliographic InfoPaper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2009-006.
Date of creation: 30 Jan 2009
Date of revision:
Risk attitudes; Cumulative prospect theory; Experimental study;
Find related papers by JEL classification:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-14 (All new papers)
- NEP-EXP-2009-02-14 (Experimental Economics)
- NEP-UPT-2009-02-14 (Utility Models & Prospect Theory)
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