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A quantification of prospect theory in the health domain

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  • Arthur E. Attema

    (iBMG/iMTA, Erasmus University, Rotterdam, Netherlands)

  • Werner B.F. Brouwer

    (iBMG/iMTA, Erasmus University, Rotterdam, Netherlands)

  • Olivier l'Haridon

    (CREM CNRS UMR 6211, University of Rennes 1, France)

Abstract

It is well-known that expected utility (EU) has empirical deficiencies. Prospect theory (PT) has developed as an alternative with more descriptive validity. However, PT’s full function had not yet been quantified in the health domain. This paper is therefore the first to simultaneously measure utility of life duration, probability weighting, and loss aversion in the health domain. We observe loss aversion and risk aversion for gains and losses, which for gains can be explained by probabilistic pessimism. Utility for gains is almost linear. For losses, we find less weighting of probability 1/2 and concave utility. This contrasts with the common finding of convex utility for monetary losses. However, PT was proposed to explain choices among lotteries involving small outcomes. Life years are arguably not ‘small’ and need not generate convex utility for losses. Moreover, utility of life duration reflects discounting, causing concave utility. These results are a first step in fitting non-EU models for health-related decisions.

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Bibliographic Info

Paper provided by Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS in its series Economics Working Paper Archive (University of Rennes 1 & University of Caen) with number 201321.

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Date of creation: Jun 2013
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Handle: RePEc:tut:cremwp:201321

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Keywords: prospect theory; life duration; QALY;

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References

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  1. Han Bleichrodt & José Luis Pinto & José María Abellán-Perpiñán, 2003. "A consistency test of the time trade-off," Economics Working Papers 676, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Masao Ogaki & Qiang Zhang, 2000. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometric Society World Congress 2000 Contributed Papers 1588, Econometric Society.
  3. Jose Luis Pinto Prades & Graham Loomes & Raul Brey, 2008. "Trying to estimate a monetary value for the QALY," Working Papers 08.09, Universidad Pablo de Olavide, Department of Economics.
  4. Han Bleichrodt & José María Abellán-Perpiñan & JoséLuis Pinto & Ildefonso Méndez-Martínez, 2005. "Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility," Economics Working Papers 798, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Abellan-Perpiñan, Jose Maria & Bleichrodt, Han & Pinto-Prades, Jose Luis, 2009. "The predictive validity of prospect theory versus expected utility in health utility measurement," Journal of Health Economics, Elsevier, vol. 28(6), pages 1039-1047, December.
  6. Kvamme, Maria Knoph & Gyrd-Hansen, Dorte & Olsen, Jan Abel & Kristiansen, Ivar Sønbø, 2010. "Increasing marginal utility of small increases in life-expectancy?: Results from a population survey," Journal of Health Economics, Elsevier, vol. 29(4), pages 541-548, July.
  7. Attema, Arthur E. & Brouwer, Werner B.F., 2009. "The correction of TTO-scores for utility curvature using a risk-free utility elicitation method," Journal of Health Economics, Elsevier, vol. 28(1), pages 234-243, January.
  8. Schmidt, Ulrich & Traub, Stefan, 2002. " An Experimental Test of Loss Aversion," Journal of Risk and Uncertainty, Springer, vol. 25(3), pages 233-49, November.
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