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Risk Aversion in Cumulative Prospect Theory

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  • U Schmidt
  • H Zank

Abstract

This paper characterizes the conditions for strong risk aversion and second-order stochastic dominance for cumulative prospect theory. Strong risk aversion implies a convex weighting function for gains and a concave one for losses. It does not necessarily imply a concave utility function. The latter does follow if the weighting functions are continuous. By investigating the exact relationship between loss aversion and strong risk aversion, a natural index for the degree of loss aversion is derived.
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Suggested Citation

  • U Schmidt & H Zank, 2002. "Risk Aversion in Cumulative Prospect Theory," The School of Economics Discussion Paper Series 0207, Economics, The University of Manchester.
  • Handle: RePEc:man:sespap:0207
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    References listed on IDEAS

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