So when are you loss averse? Testing the S-shaped function in pricing and allocation tasks
In this paper, we describe three different experiments that explore participants’ risk attitude. When we analyzed the average results, we found that participants behave as the S-shape value function predicts. However, breaking the data down on the individual level reveals that the S-shape is valid just for about one-third of the cases. This result emerged from all three experiments. In the first experiment, we used lotteries with different stakes and found that in the high stake only 31% of the participants behave as the S-shape value function predicts. The percentage decreases to 16% when the stakes were lowered. In the second experiment, we used the prepayment mechanism (PPM) to create a more realistic experimental environment. In this case, 37% of the participants behaved consistently with the S-shape value function. In the third experiment, we used allocation tasks. The results revealed that most subjects could not be classified into one of the classical risk attitude groups. Our results imply that more than one value function is needed to characterize individuals’ attitudes toward risk. Deeper analysis is needed to characterize different value functions for different groups of individuals.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Don L. Coursey & John L. Hovis & William D. Schulze, 1987. "The Disparity Between Willingness to Accept and Willingness to Pay Measures of Value," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 679-690.
- Shahrabani, Shosh & Shavit, Tal & Benzion, Uri, 2008.
"Short-selling and the WTA-WTP gap,"
Elsevier, vol. 99(1), pages 131-133, April.
- Levy, Haim & Levy, Moshe, 2002. "Experimental test of the prospect theory value function: A stochastic dominance approach," Organizational Behavior and Human Decision Processes, Elsevier, vol. 89(2), pages 1058-1081, November.
- Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
- Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Zion, Uri Ben & Erev, Ido & Haruvy, Ernan & Shavit, Tal, 2010. "Adaptive behavior leads to under-diversification," Journal of Economic Psychology, Elsevier, vol. 31(6), pages 985-995, December.
- Gerlinde Fellner & Erik Theissen, 2006.
"Short Sale Constraints, Divergence of Opinion and Asset Values: Evidence from the Laboratory,"
Labsi Experimental Economics Laboratory University of Siena
009, University of Siena.
- Fellner, Gerline & Theissen, Erik, 2011. "Short sale constraints, divergence of opinion and asset values: Evidence from the laboratory," CFS Working Paper Series 2011/05, Center for Financial Studies (CFS).
- Fellner, Gerlinde & Theissen, Erik, 2011. "Short sale constraints, divergence of opinion and asset value: Evidence from the laboratory," CFR Working Papers 11-03, University of Cologne, Centre for Financial Research (CFR).
- R. Luce, 2010. "Behavioral assumptions for a class of utility theories: A program of experiments," Journal of Risk and Uncertainty, Springer, vol. 41(1), pages 19-37, August.
- Ernan Haruvy & Charles N. Noussair, 2006. "The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets," Journal of Finance, American Finance Association, vol. 61(3), pages 1119-1157, 06.
- Goeree, Jacob K. & Offerman, Theo, 2003. "Winner's curse without overbidding," European Economic Review, Elsevier, vol. 47(4), pages 625-644, August.
- Shogren, Jason F. & Cho, Sungwon & Koo, Cannon & List, John & Park, Changwon & Polo, Pablo & Wilhelmi, Robert, 2001. "Auction mechanisms and the measurement of WTP and WTA," Resource and Energy Economics, Elsevier, vol. 23(2), pages 97-109, April.
- Shavit, Tal & Sonsino, Doron & Benzion, Uri, 2001. "A comparative study of lotteries-evaluation in class and on the Web," Journal of Economic Psychology, Elsevier, vol. 22(4), pages 483-491, August.
- William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
- Battalio, Raymond C & Kagel, John H & Jiranyakul, Komain, 1990. "Testing between Alternative Models of Choice under Uncertainty: Some Initial Results," Journal of Risk and Uncertainty, Springer, vol. 3(1), pages 25-50, March.
- Bosch-Domenech, Antoni & Silvestre, Joaquim, 1999.
"Does risk aversion or attraction depend on income? An experiment,"
Elsevier, vol. 65(3), pages 265-273, December.
- Antoni Bosch-Domènech & Joaquim Silvestre, 1999. "Does risk aversion or attraction depend on income? An experiment," Economics Working Papers 361, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 1999.
- C. Ng & R. Duncan Luce & A. Marley, 2009. "Utility of Gambling when Events are Valued: an Application of Inset Entropy," Theory and Decision, Springer, vol. 67(1), pages 23-63, July.
- R. Luce, 2010. "Interpersonal comparisons of utility for 2 of 3 types of people," Theory and Decision, Springer, vol. 68(1), pages 5-24, February.
- Alvin E. Roth & Axel Ockenfels, 2002.
"Last-Minute Bidding and the Rules for Ending Second-Price Auctions: Evidence from eBay and Amazon Auctions on the Internet,"
American Economic Review,
American Economic Association, vol. 92(4), pages 1093-1103, September.
- Alvin E. Roth & Axel Ockenfels, . "Last-Minute Bidding and the Rules for Ending Second-Price Auctions: Evidence from eBay and Amazon Auctions on the Internet," Papers on Strategic Interaction 2002-32, Max Planck Institute of Economics, Strategic Interaction Group.
- Moshe Levy & Haim Levy, 2002. "Prospect Theory: Much Ado About Nothing?," Management Science, INFORMS, vol. 48(10), pages 1334-1349, October.
- WilliamT Harbaugh & Kate Krause & Lise Vesterlund, 2010. "The Fourfold Pattern of Risk Attitudes in Choice and Pricing Tasks," Economic Journal, Royal Economic Society, vol. 120(545), pages 595-611, 06.
- Harless, David W., 1989. "More laboratory evidence on the disparity between willingness to pay and compensation demanded," Journal of Economic Behavior & Organization, Elsevier, vol. 11(3), pages 359-379, May.
- Eisenberger, Roselies & Weber, Martin, 1995. "Willingness-to-Pay and Willingness-to-Accept for Risky and Ambiguous Lotteries," Journal of Risk and Uncertainty, Springer, vol. 10(3), pages 223-33, May.
- Susan K. Laury & Charles A. Holt, 2005. "Further Reflections on Prospect Theory," Experimental Economics Center Working Paper Series 2006-23, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
- Jeff T. Casey, 1994. "Buyers' Pricing Behavior for Risky Alternatives: Encoding Processes and Preference Reversals," Management Science, INFORMS, vol. 40(6), pages 730-749, June.
- Mosi Rosenboim & Tal Shavit, 2012. "Whose money is it anyway? Using prepaid incentives in experimental economics to create a natural environment," Experimental Economics, Springer, vol. 15(1), pages 145-157, March.
- 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.
- David Gal, 2006. "A psychological law of inertia and the illusion of loss aversion," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 1, pages 23-32, July.
When requesting a correction, please mention this item's handle: RePEc:eee:joepsy:v:39:y:2013:i:c:p:101-112. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.