IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/44207.html
   My bibliography  Save this paper

Prospect theory in the health domain: a quantitative assessment

Author

Listed:
  • Attema, Arthur
  • Brouwer, Werner
  • l'Haridon, Olivier

Abstract

It is well-known that expected utility (EU) has empirical deficiencies. Prospect theory (PT) has developed as an alternative with more descriptive validity. However, PT’s full function had not yet been quantified in the health domain. This paper is the first to simultaneously measure utility of life duration, probability weighting, and loss aversion for health. We observe loss aversion and risk aversion, which for gains can be explained by probabilistic pessimism. Utility for gains is almost linear. For losses, we find less weighting of probability 1/2 and concave utility. This contrasts with the common finding of convex utility for monetary losses. However, PT was proposed to explain choices among lotteries involving small outcomes. Life years are arguably not ‘small’ and need not generate convex utility for losses. Moreover, utility of life duration reflects discounting, causing concave utility. These results are a first step in fitting non-EU models for health-related decisions.

Suggested Citation

  • Attema, Arthur & Brouwer, Werner & l'Haridon, Olivier, 2013. "Prospect theory in the health domain: a quantitative assessment," MPRA Paper 44207, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:44207
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/44207/1/MPRA_paper_44207.pdf
    File Function: original version
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Amiram Gafni & George W. Torrance, 1984. "Risk Attitude and Time Preference in Health," Management Science, INFORMS, vol. 30(4), pages 440-451, April.
    2. Adam Booij & Bernard Praag & Gijs Kuilen, 2010. "A parametric analysis of prospect theory’s functionals for the general population," Theory and Decision, Springer, vol. 68(1), pages 115-148, February.
    3. Mohammed Abdellaoui & Olivier L'Haridon & Corina Paraschiv, 2011. "Experienced vs. Described Uncertainty: Do We Need Two Prospect Theory Specifications?," Management Science, INFORMS, vol. 57(10), pages 1879-1895, October.
    4. Chateauneuf, Alain & Cohen, Michele, 1994. "Risk Seeking with Diminishing Marginal Utility in a Non-expected Utility Model," Journal of Risk and Uncertainty, Springer, vol. 9(1), pages 77-91, July.
    5. Marquis, M Susan & Holmer, Martin R, 1996. "Alternative Models of Choice under Uncertainty and Demand for Health Insurance," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 421-427, August.
    6. Mohammed Abdellaoui & Han Bleichrodt & Olivier L’Haridon, 2008. "A tractable method to measure utility and loss aversion under prospect theory," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 245-266, June.
    7. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    8. Pinto-Prades, Jose Luis & Loomes, Graham & Brey, Raul, 2009. "Trying to estimate a monetary value for the QALY," Journal of Health Economics, Elsevier, vol. 28(3), pages 553-562, May.
    9. Mohammed Abdellaoui & Han Bleichrodt & Corina Paraschiv, 2007. "Loss Aversion Under Prospect Theory: A Parameter-Free Measurement," Management Science, INFORMS, vol. 53(10), pages 1659-1674, October.
    10. 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.
    11. Bleichrodt, Han & Pinto, Jose Luis & Maria Abellan-Perpinan, Jose, 2003. "A consistency test of the time trade-off," Journal of Health Economics, Elsevier, vol. 22(6), pages 1037-1052, November.
    12. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
    13. Booij, Adam S. & van de Kuilen, Gijs, 2009. "A parameter-free analysis of the utility of money for the general population under prospect theory," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 651-666, August.
    14. George Wu & Richard Gonzalez, 1999. "Nonlinear Decision Weights in Choice Under Uncertainty," Management Science, INFORMS, vol. 45(1), pages 74-85, January.
    15. Ogaki, Masao & Zhang, Qiang, 2001. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometrica, Econometric Society, vol. 69(2), pages 515-526, March.
    16. Han Bleichrodt & Jose Luis Pinto & Peter P. Wakker, 2001. "Making Descriptive Use of Prospect Theory to Improve the Prescriptive Use of Expected Utility," Management Science, INFORMS, vol. 47(11), pages 1498-1514, November.
    17. 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.
    18. Bostic, Raphael & Herrnstein, R. J. & Luce, R. Duncan, 1990. "The effect on the preference-reversal phenomenon of using choice indifferences," Journal of Economic Behavior & Organization, Elsevier, vol. 13(2), pages 193-212, March.
    19. Henry Stott, 2006. "Cumulative prospect theory's functional menagerie," Journal of Risk and Uncertainty, Springer, vol. 32(2), pages 101-130, March.
    20. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    21. Arthur Attema & Werner Brouwer, 2012. "The way that you do it? An elaborate test of procedural invariance of TTO, using a choice-based design," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 13(4), pages 491-500, August.
    22. A E Attema, 2012. "Developments in time preference and their implications for medical decision making," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 63(10), pages 1388-1399, October.
    23. Abellan-Perpiñan, Jose Maria & Bleichrodt, Han & Pinto-Prades, Jose Luis, 2009. "The predictive validity of prospect theory versus expected utility in health utility measurement," Journal of Health Economics, Elsevier, vol. 28(6), pages 1039-1047, December.
    24. 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.
    25. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
    26. Mohammed Abdellaoui & Enrico Diecidue & Ayse Öncüler, 2011. "Risk Preferences at Different Time Periods: An Experimental Investigation," Management Science, INFORMS, vol. 57(5), pages 975-987, May.
    27. Ulrich Schmidt & Horst Zank, 2012. "A genuine foundation for prospect theory," Journal of Risk and Uncertainty, Springer, vol. 45(2), pages 97-113, October.
    28. Han Bleichrodt & Jose Maria Abellan-Perpiñan & Jose Luis Pinto-Prades & Ildefonso Mendez-Martinez, 2007. "Resolving Inconsistencies in Utility Measurement Under Risk: Tests of Generalizations of Expected Utility," Management Science, INFORMS, vol. 53(3), pages 469-482, March.
    29. Wakker,Peter P., 2010. "Prospect Theory," Cambridge Books, Cambridge University Press, number 9780521765015, August.
    30. Dan J. Laughhunn & John W. Payne & Roy Crum, 1980. "Managerial Risk Preferences for Below-Target Returns," Management Science, INFORMS, vol. 26(12), pages 1238-1249, December.
    31. Kvamme, Maria Knoph & Gyrd-Hansen, Dorte & Olsen, Jan Abel & Kristiansen, Ivar Sønbø, 2010. "Increasing marginal utility of small increases in life-expectancy?: Results from a population survey," Journal of Health Economics, Elsevier, vol. 29(4), pages 541-548, July.
    32. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    33. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    34. Attema, Arthur E. & Brouwer, Werner B.F., 2009. "The correction of TTO-scores for utility curvature using a risk-free utility elicitation method," Journal of Health Economics, Elsevier, vol. 28(1), pages 234-243, January.
    35. Oliver, Adam, 2003. "The internal consistency of the standard gamble: tests after adjusting for prospect theory," Journal of Health Economics, Elsevier, vol. 22(4), pages 659-674, July.
    36. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May.
    37. José-María Abellán-Perpiñán & José-Luis Pinto-Prades & Ildefonso Méndez-Martínez & Xabier Badía-Llach, 2006. "Towards a better QALY model," Health Economics, John Wiley & Sons, Ltd., vol. 15(7), pages 665-676.
    38. Floortje van Nooten & Werner Brouwer, 2004. "The influence of subjective expectations about length and quality of life on time trade-off answers," Health Economics, John Wiley & Sons, Ltd., vol. 13(8), pages 819-823.
    39. Miyamoto, John M. & Eraker, Stephen A., 1989. "Parametric models of the utility of survival duration: Tests of axioms in a generic utility framework," Organizational Behavior and Human Decision Processes, Elsevier, vol. 44(2), pages 166-202, October.
    40. Bleichrodt, Han & Quiggin, John, 1997. "Characterizing QALYs under a General Rank Dependent Utility Model," Journal of Risk and Uncertainty, Springer, vol. 15(2), pages 151-165, November.
    41. Helga Fehr-Duda & Manuele Gennaro & Renate Schubert, 2006. "Gender, Financial Risk, and Probability Weights," Theory and Decision, Springer, vol. 60(2), pages 283-313, May.
    42. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages 251-278, October.
    43. Sylvie M. C. van Osch & Anne M. Stiggelbout, 2008. "The construction of standard gamble utilities," Health Economics, John Wiley & Sons, Ltd., vol. 17(1), pages 31-40.
    44. Schmidt, Ulrich & Traub, Stefan, 2002. "An Experimental Test of Loss Aversion," Journal of Risk and Uncertainty, Springer, vol. 25(3), pages 233-249, November.
    45. Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:spr:eujhec:v:19:y:2018:i:6:d:10.1007_s10198-017-0925-3 is not listed on IDEAS
    2. Dixit, Vinayak V. & Harb, Rami C. & Martínez-Correa, Jimmy & Rutström, Elisabet E., 2015. "Measuring risk aversion to guide transportation policy: Contexts, incentives, and respondents," Transportation Research Part A: Policy and Practice, Elsevier, vol. 80(C), pages 15-34.
    3. Rheinberger, Christoph M. & Herrera-Araujo, Daniel & Hammitt, James K., 2016. "The value of disease prevention vs treatment," Journal of Health Economics, Elsevier, vol. 50(C), pages 247-255.
    4. Han Bleichrodt & Yu Gao & Kirsten I. M. Rohde, 2016. "A measurement of decreasing impatience for health and money," Journal of Risk and Uncertainty, Springer, vol. 52(3), pages 213-231, June.
    5. K. P. M. Winssen & R. C. Kleef & W. P. M. M. Ven, 2016. "Potential determinants of deductible uptake in health insurance: How to increase uptake in The Netherlands?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 17(9), pages 1059-1072, December.
    6. repec:fgv:eaerae:v:57:y:2017:i:5:a:71818 is not listed on IDEAS
    7. Sophie Massin & Antoine Nebout & Bruno Ventelou, 2018. "Predicting medical practices using various risk attitude measures," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 19(6), pages 843-860, July.
    8. Attema, Arthur E. & Brouwer, Werner B.F. & l’Haridon, Olivier & Pinto, Jose Luis, 2015. "Estimating sign-dependent societal preferences for quality of life," Journal of Health Economics, Elsevier, vol. 43(C), pages 229-243.
    9. repec:eee:jeborg:v:137:y:2017:i:c:p:374-397 is not listed on IDEAS
    10. Hammitt, James K. & Herrera-Araujo, Daniel & Rheinberger, Christoph, 2016. "The Value of Cancer Prevention vs Treatment," TSE Working Papers 16-628, Toulouse School of Economics (TSE).
    11. Festjens, Anouk & Bruyneel, Sabrina & Diecidue, Enrico & Dewitte, Siegfried, 2015. "Time-based versus money-based decision making under risk: An experimental investigation," Journal of Economic Psychology, Elsevier, vol. 50(C), pages 52-72.
    12. Petrolia, Daniel R., 2016. "Risk preferences, risk perceptions, and risky food," Food Policy, Elsevier, vol. 64(C), pages 37-48.
    13. repec:spr:sochwe:v:51:y:2018:i:1:d:10.1007_s00355-018-1111-y is not listed on IDEAS
    14. Attema, Arthur E. & Brouwer, Werner B.F. & l’Haridon, Olivier & Pinto, Jose Luis, 2016. "An elicitation of utility for quality of life under prospect theory," Journal of Health Economics, Elsevier, vol. 48(C), pages 121-134.
    15. Müller, Julia & Li, Zhihua & Wakker, Peter P. & Wang, Tong V., 2016. "The Rich Domain of Ambiguity Explored," Annual Conference 2016 (Augsburg): Demographic Change 145734, Verein für Socialpolitik / German Economic Association.
    16. repec:spr:eujhec:v:19:y:2018:i:2:d:10.1007_s10198-017-0883-9 is not listed on IDEAS

    More about this item

    Keywords

    Loss aversion; Prospect theory; QALY model; Utility of life duration;

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • I10 - Health, Education, and Welfare - - Health - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:44207. 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: (Joachim Winter). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.