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Risk Aversion in Cumulative Prospect Theory

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  • Schmidt, Ulrich

    (Christian-Albrechts-Universit”t zu Kiel, The University of Manchester)

  • Horst Zank

Abstract

This paper characterizes the conditions for risk aversion in cumulative prospect theory where risk aversion is defined in the strong sense (Rothshild Stiglitz 1970). Under weaker assumptions than differentiability we show that risk aversion implies convex weighting functions for gains and for losses but not necessarily a concave utility function. Also, we investigate the exact relationship between loss aversion and risk aversion. We illustrate the analysis by considering two special cases of cumulative prospect theory and show that risk aversion and convex utility may coexist.

Suggested Citation

  • Schmidt, Ulrich & Horst Zank, 2002. "Risk Aversion in Cumulative Prospect Theory," Royal Economic Society Annual Conference 2002 162, Royal Economic Society.
    • Handle: RePEc:ecj:ac2002:162
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