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Advances in Prospect Theory: Cumulative Representation of Uncertainty

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  • Tversky, Amos
  • Kahneman, Daniel

Abstract

We develop a new version of prospect theory that employs cumulative rather than separable decision weights and extends the theory in several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses. Two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment confirm a distinctive fourfold pattern of risk: risk aversion for gains and risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low probability. Copyright 1992 by Kluwer Academic Publishers

Suggested Citation

  • 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.
  • Handle: RePEc:kap:jrisku:v:5:y:1992:i:4:p:297-323
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    1. Anna Alberini & Maureen Cropper & Alan Krupnick & Nathalie Simon, 2006. "Willingness to pay for mortality risk reductions: Does latency matter?," Journal of Risk and Uncertainty, Springer, vol. 32(3), pages 231-245, May.
    2. V. Kerry Smith & Donald H. Taylor & Frank A. Sloan, 2001. "Longevity Expectations and Death: Can People Predict Their Own Demise?," American Economic Review, American Economic Association, vol. 91(4), pages 1126-1134, September.
    3. James Hammitt & Jin-Tan Liu, 2004. "Effects of Disease Type and Latency on the Value of Mortality Risk," Journal of Risk and Uncertainty, Springer, vol. 28(1), pages 73-95, January.
    4. Krupnick, Alan & Alberini, Anna & Cropper, Maureen & Simon, Nathalie & O'Brien, Bernie & Goeree, Ron & Heintzelman, Martin, 2002. "Age, Health and the Willingness to Pay for Mortality Risk Reductions: A Contingent Valuation Survey of Ontario Residents," Journal of Risk and Uncertainty, Springer, vol. 24(2), pages 161-186, March.
    5. Takahiro Tsuge & Atsuo Kishimoto & Kenji Takeuchi, 2005. "A Choice Experiment Approach to the Valuation of Mortality," Journal of Risk and Uncertainty, Springer, vol. 31(1), pages 73-95, July.
    6. Viscusi, W Kip & Aldy, Joseph E, 2003. "The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," Journal of Risk and Uncertainty, Springer, vol. 27(1), pages 5-76, August.
    7. Shackley, Phil & Donaldson, Cam, 2002. "Should we use willingness to pay to elicit community preferences for health care?: New evidence from using a 'marginal' approach," Journal of Health Economics, Elsevier, vol. 21(6), pages 971-991, November.
    8. Krupnick, Alan J & Cropper, Maureen L, 1992. "The Effect of Information on Health Risk Valuations," Journal of Risk and Uncertainty, Springer, vol. 5(1), pages 29-48, February.
    9. Protière, Christel & Donaldson, Cam & Luchini, Stéphane & Paul Moatti, Jean & Shackley, Phil, 2004. "The impact of information on non-health attributes on willingness to pay for multiple health care programmes," Social Science & Medicine, Elsevier, vol. 58(7), pages 1257-1269, April.
    10. Wesley A. Magat & W. Kip Viscusi & Joel Huber, 1996. "A Reference Lottery Metric for Valuing Health," Management Science, INFORMS, vol. 42(8), pages 1118-1130, August.
    11. Baron, Jonathan, 1997. "Confusion of Relative and Absolute Risk in Valuation," Journal of Risk and Uncertainty, Springer, vol. 14(3), pages 301-309, May-June.
    12. Stéphane Luchini & Christel Protière & Jean-Paul Moatti, 2003. "Eliciting several willingness to pay in a single contingent valuation survey: application to health care," Health Economics, John Wiley & Sons, Ltd., vol. 12(1), pages 51-64.
    13. Cameron, Trudy Ann & James, Michelle D, 1987. "Efficient Estimation Methods for "Closed-ended' Contingent Valuation Surveys," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 269-276, May.
    14. Gyldmark, Marlene & Morrison, Gwendolyn C., 2001. "Demand for health care in Denmark: results of a national sample survey using contingent valuation," Social Science & Medicine, Elsevier, vol. 53(8), pages 1023-1036, October.
    15. repec:reg:rpubli:282 is not listed on IDEAS
    16. Kip Viscusi, W. & Magat, Wesley A. & Huber, Joel, 1991. "Pricing environmental health risks: survey assessments of risk-risk and risk-dollar trade-offs for chronic bronchitis," Journal of Environmental Economics and Management, Elsevier, vol. 21(1), pages 32-51, July.
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