Prospect Theory in Choice and Pricing Tasks
The most distinctive prediction of prospect theory is the fourfold pattern (FFP) of risk attitudes. People are said to be (1) risk-seeking over low-probability gains, (2) risk-averse over low-probability losses, (3) risk-averse over high-probability gains, and (4) risk-seeking over high-probability losses. Using simple gambles over real payoffs, we conduct a direct test of this FFP prediction. We find that when pricing gambles subjects’ risk attitudes are consistent with the FFP. However, when they choose between the gamble and its expected value, their decisions are not distinguishable from random choice and are often the exact opposite of the prediction. These results hold both between and within subjects, and are robust even when we allow the subjects to simultaneously review and change their price and choice decisions.
|Date of creation:||20 Jul 2002|
|Date of revision:||20 Aug 2007|
|Contact details of provider:|| Postal: |
Phone: (541) 346-4661
Fax: (541) 346-1243
Web page: http://economics.uoregon.edu/Email:
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ore:uoecwp:2002-02. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bill Harbaugh)
If references are entirely missing, you can add them using this form.