Understanding the Two Components of Risk Attitudes: An Experimental Analysis
Cumulative Prospect Theory (PT) introduced the weighting of probabilities as an additional component to capture risk attitudes. However, this addition would be a less significant challenge to expected utility theory (EU) if utility curvature and probability weighting showed strong positive correlation. In that case the utility curvature in EU alone, while not properly describing risky behavior in general, would still capture most of the variance of individual risk aversion. This study provides experimental evidence that such a strong and positive correlation does not exist. Although most individuals exhibit concave utility and convex probability weighting, the two components show no strong positive correlation.
|Date of creation:||24 Aug 2010|
|Contact details of provider:|| Postal: Carl-Zeiss-Strasse 3, 07743 JENA|
Phone: +049 3641/ 9 43000
Fax: +049 3641/ 9 43000
Web page: http://www.jenecon.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gijs Kuilen, 2009. "Subjective Probability Weighting and the Discovered Preference Hypothesis," Theory and Decision, Springer, vol. 67(1), pages 1-22, July.
- Mohammed Abdellaoui & Frank Vossmann & Martin Weber, 2005.
"Choice-Based Elicitation and Decomposition of Decision Weights for Gains and Losses Under Uncertainty,"
INFORMS, vol. 51(9), pages 1384-1399, September.
- Abdellaoui, Mohammed & Vossman, Frank & Weber, Martin, 2003. "Choice-Based Elicitation and Decomposition of Decision Weights for Gains and Losses Under Uncertainty," CEPR Discussion Papers 3756, C.E.P.R. Discussion Papers.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Harrison, Glenn W., 1986. "Risk aversion and preference distortion in deterministic bargaining experiments," Economics Letters, Elsevier, vol. 22(2-3), pages 191-196.
- Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
- Gijs van de Kuilen & Peter P. Wakker, 2011. "The Midweight Method to Measure Attitudes Toward Risk and Ambiguity," Management Science, INFORMS, vol. 57(3), pages 582-598, March.
- van de Kuilen, G. & Wakker, P.P., 2011. "The midweight method to measure attitudes towards risk and ambiguity," Other publications TiSEM c58a6884-24cc-4cab-ae2f-a, Tilburg University, School of Economics and Management.
- Peter Wakker & Daniel Deneffe, 1996. "Eliciting von Neumann-Morgenstern Utilities When Probabilities Are Distorted or Unknown," Management Science, INFORMS, vol. 42(8), pages 1131-1150, August.
- Camerer, Colin F, 1989. "An Experimental Test of Several Generalized Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 61-104, April.
- Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
- Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June. Full references (including those not matched with items on IDEAS)