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Understanding Risk Attitudes in two Dimensions: An Experimental Analysis

Author

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  • Jianying Qiu
  • Eva-Maria Steiger

Abstract

Despite extensive studies, the nature of risk attitudes remains a vigorously discussed question in economics and psychology. In expected utility theory, attitudes towards risk originate from changes in marginal utility. Cumulative prospect theory (CPT) adds an additional dimension: the weighting of probabilities. By examining both dimensions, we strive to gain more insight on the relation between the curvature of utility function and probability weighting, and on possible relations to cognitive limitations. Our findings from a controlled laboratory experiment suggest that the two dimensions capture quite different characteristics. Though, most individuals exhibit concave utility and convex probability weighting, the two dimensions show no significant correlation. In addition, only probability weighting, not the curvature of utility function, is correlated with educational background and decision time, which suggests its relation to cognitive limitations.

Suggested Citation

  • Jianying Qiu & Eva-Maria Steiger, 2009. "Understanding Risk Attitudes in two Dimensions: An Experimental Analysis," Working Papers 2009-11, Faculty of Economics and Statistics, Universität Innsbruck.
    • Handle: RePEc:inn:wpaper:2009-11
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    More about this item

    Keywords

    Risk attitudes; cumulative prospect theory; experimental study;
    All these keywords.

    JEL classification:

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

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