Risk Aversion in Cumulative Prospect Theory
AbstractThis paper characterizes the conditions for risk aversion in cumulative prospect theory where risk aversion is defined in the strong sense (Rothshild Stiglitz 1970). Under weaker assumptions than differentiability we show that risk aversion implies convex weighting functions for gains and for losses but not necessarily a concave utility function. Also, we investigate the exact relationship between loss aversion and risk aversion. We illustrate the analysis by considering two special cases of cumulative prospect theory and show that risk aversion and convex utility may coexist.
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Bibliographic InfoPaper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 0207.
Date of creation: 2002
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