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Risk behavior for gain, loss, and mixed prospects

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  • Peter Brooks
  • Simon Peters
  • Horst Zank

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Abstract

This study extends experimental tests of (cumulative) prospect theory (PT) over prospects with more than three outcomes and tests second-order stochastic dominance principles (Levy and Levy, Management Science 48:1334–1349, 2002 ; Baucells and Heukamp, Management Science 52:1409–1423, 2006 ). It considers choice behavior of people facing prospects of three different types: gain prospects (losing is not possible), loss prospects (gaining is not possible), and mixed prospects (both gaining and losing are possible). The data supports the distinction of risk behavior into these three categories of prospects, Further, probability weighting and diminishing sensitivity of utility as predicted by PT are observed. Loss aversion is, however, less pronounced, except for choices where one prospect is degenerate. The data suggests that the probability of losing may be relevant for loss aversion. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Peter Brooks & Simon Peters & Horst Zank, 2014. "Risk behavior for gain, loss, and mixed prospects," Theory and Decision, Springer, vol. 77(2), pages 153-182, August.
  • Handle: RePEc:kap:theord:v:77:y:2014:i:2:p:153-182
    DOI: 10.1007/s11238-013-9396-x
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    1. repec:bpj:bejtec:v:17:y:2017:i:2:p:14:n:8 is not listed on IDEAS
    2. repec:kap:theord:v:82:y:2017:i:3:d:10.1007_s11238-016-9567-7 is not listed on IDEAS
    3. Ormos Mihály & Timotity Dusán, 2017. "The Case of “Less is More”: Modelling Risk-Preference with Expected Downside Risk," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 17(2), pages 1-14, June.
    4. Glenn W. Harrison & J. Todd Swarthout, 2016. "Cumulative Prospect Theory in the Laboratory: A Reconsideration," Experimental Economics Center Working Paper Series 2016-04, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.

    More about this item

    Keywords

    Binary choice; Loss aversion; Prospect theory; Probability weighting; Second-order stochastic dominance; D81; C91;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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