A Simple Method of Elicitation of Preferences under Risk

This study estimates the utility of lotteries and the degree of loss aversion of participants in an experiment, using prospect theory. For this purpose, we apply the parametric method proposed by Abdellaoui et al. (2008) to preferences observed in a computer-based experiment conducted at Universidade de Brasília. Most participants displayed risk aversion for gain prospects and risk propensity for loss prospects. Real incentives for loss prospects led to a greater concavity of the utility function than the one estimated by Abdellaoui et al. (2008). We observed reversals in behavior toward risk in the presence of a certain gain or loss in the prospect, which implies an overweight of the probability weighting function and is a new behavioral finding. Moreover, three different measures of loss aversion are discussed and, when applied to the experimental data, they were more appropriate with its theoretical definition than the most widely used measure of Tversky and Kahneman (1992).