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A quantification of prospect theory in the health domain

Author

Listed:
  • 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.

Suggested Citation

  • Arthur E. Attema & Werner B.F. Brouwer & Olivier l'Haridon, 2013. "A quantification of prospect theory in the health domain," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201321, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    • Handle: RePEc:tut:cremwp:201321
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    prospect theory; life duration; QALY;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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