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Understanding the Two Components of Risk Attitudes: An Experimental Analysis

  • Jianying Qiu

    ()

    (Department of Economics, University of Innsbruck)

  • Eva-Maria Steiger

    ()

    (Strategic Interaction Group, Max Planck Institute of Economics, Jena)

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.

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File URL: http://pubdb.wiwi.uni-jena.de/pdf/wp_2010_053.pdf
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Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2010-053.

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Date of creation: 24 Aug 2010
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Handle: RePEc:jrp:jrpwrp:2010-053
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  1. Gijs Kuilen, 2009. "Subjective Probability Weighting and the Discovered Preference Hypothesis," Theory and Decision, Springer, vol. 67(1), pages 1-22, July.
  2. 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.
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