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Behavior in the loss domain: An experiment using the probability trade-off consistency condition

  • L'Haridon, Olivier

In gambles with two or more outcomes, the two versions of prospect theory, i.e., original prospect theory and cumulative prospect theory, make use of different composition rules and therefore yield different valuations of gambles. We test these composition rules in the loss domain using the probability trade-off consistency condition. The probability trade-off consistency condition offers a convenient and efficient way to compare gambles under risk and decision makers' behavior. Experimental findings suggest that the rank dependent version of prospect theory, or cumulative prospect theory, cannot be rejected in the loss domain while original prospect theory is clearly rejected when a certainty effect is taken into account.

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Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 30 (2009)
Issue (Month): 4 (August)
Pages: 540-551

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Handle: RePEc:eee:joepsy:v:30:y:2009:i:4:p:540-551
Contact details of provider: Web page: http://www.elsevier.com/locate/joep

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  1. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
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