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Prospect Theory in Choice and Pricing Tasks


  • William T. Harbaugh

    () (University of Oregon Economics Department)

  • Kate Krause

    () (University of New Mexico Economics Department)

  • Lise Vesterlund

    () (University of Pittsburgh Economics Department)


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.

Suggested Citation

  • William T. Harbaugh & Kate Krause & Lise Vesterlund, 2002. "Prospect Theory in Choice and Pricing Tasks," University of Oregon Economics Department Working Papers 2002-02, University of Oregon Economics Department, revised 20 Aug 2007.
  • Handle: RePEc:ore:uoecwp:2002-02

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    Cited by:

    1. Morone, Andrea & Ozdemir, Ozlem, 2012. "Black swan protection: an experimental investigation," MPRA Paper 38842, University Library of Munich, Germany.

    More about this item


    probability weighting; expected utility; prospect theory; cumulative prospect theory; preference reversal;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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