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Averting risk in the face of large losses: Bernoulli vs. Tversky and Kahneman

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Abstract

We experimentally question the assertion of Prospect Theory that people display risk attraction in choices involving high-probability losses. Indeed, our experimental participants tend to avoid fair risks for large (up to € 90), high-probability (80%) losses. Our research hinges on a novel experimental method designed to alleviate the house-money bias that pervades experiments with real (not hypothetical) loses. Our results vindicate Daniel Bernoulli’s view that risk aversion is the dominant attitude, But, contrary to the Bernoulli-inspired canonical expected utility theory, we do find frequent risk attraction for small amounts of money at stake. In any event, we attempt neither to test expected utility versus nonexpected utility theories, nor to contribute to the important literature that estimates value and weighting functions. The question that we ask is more basic, namely: do people display risk aversion when facing large losses, or large gains? And, at the risk of oversimplifying, our answer is yes.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 932.

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Date of creation: Jan 2006
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Handle: RePEc:upf:upfgen:932

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Losses; Risk Attraction; Risk Aversion; Experiments; Prospect Theory; Bernoulli; Kahneman; Tversky; Leex;

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References

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  1. Peter Brooks & Horst Zank, 2005. "Loss Averse Behavior," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 301-325, December.
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  23. Antoni Bosch-Domènech & Joaquim Silvestre, 2002. "Reflections on gains and losses: A 2x2x7 experiment," Economics Working Papers 640, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2005.
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Citations

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Cited by:
  1. Nathalie Etchart-Vincent & Olivier l’Haridon, 2011. "Monetary incentives in the loss domain and behavior toward risk: An experimental comparison of three reward schemes including real losses," Journal of Risk and Uncertainty, Springer, vol. 42(1), pages 61-83, February.
  2. Antoni Bosch-Domènech & Joaquim Silvestre, 2006. "Reflections on gains and losses: A 2 × 2 × 7 experiment," Journal of Risk and Uncertainty, Springer, vol. 33(3), pages 217-235, December.
  3. Antoni Bosch-Dom�nech & Joaquim Silvestre, 2012. "Measuring Risk Aversion with Lists: A New Bias," Working Papers 634, Barcelona Graduate School of Economics.
  4. Bosch-Domenech, Antoni & Silvestre, Joaquim, 2012. "Measuring Risk Aversion with Lists: A New Bias," Working Papers 2012-10, University of California at Davis, Department of Economics.
  5. Luis Roberto Martínez & Christian Jaramillo & Nicolas De Roux & Juan-Camilo Cárdenas, 2010. "It’s Not My Money: An Experiment on Risk Aversion and the House-money Effect," DOCUMENTOS CEDE 006712, UNIVERSIDAD DE LOS ANDES-CEDE.
  6. Antoni Bosch-Domènech & Joaquim Silvestre, 2006. "Risk aversion and embedding bias," Economics Working Papers 934, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Antoni Bosch-Domènech & Joaquim Silvestre, 2012. "Measuring risk aversion with lists: A new bias," Working Papers 1210, University of California, Davis, Department of Economics.

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