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Prospect Theory in Choice and Pricing Tasks

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Author Info

  • William T. Harbaugh

    ()
    (University of Oregon Economics Department)

  • Kate Krause

    ()
    (University of New Mexico Economics Department)

  • Lise Vesterlund

    ()
    (University of Pittsburgh Economics Department)

Abstract

The most distinctive prediction of prospect theory is the fourfold pattern (FFP) of risk attitudes. People are said to be (1) risk-seeking over low-probability gains, (2) risk-averse over low-probability losses, (3) risk-averse over high-probability gains, and (4) risk-seeking over high-probability losses. Using simple gambles over real payoffs, we conduct a direct test of this FFP prediction. We find that when pricing gambles subjects’ risk attitudes are consistent with the FFP. However, when they choose between the gamble and its expected value, their decisions are not distinguishable from random choice and are often the exact opposite of the prediction. These results hold both between and within subjects, and are robust even when we allow the subjects to simultaneously review and change their price and choice decisions.

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Bibliographic Info

Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2002-02.

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Length: 27
Date of creation: 20 Jul 2002
Date of revision: 20 Aug 2007
Handle: RePEc:ore:uoecwp:2002-02

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Related research

Keywords: probability weighting; expected utility; prospect theory; cumulative prospect theory; preference reversal;

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Cited by:
  1. Morone, Andrea & Ozdemir, Ozlem, 2012. "Black swan protection: an experimental investigation," MPRA Paper 38842, University Library of Munich, Germany.

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