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Prospect theory in the health domain: a quantitative assessment

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  • 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.

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  • 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
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    More about this item

    Keywords

    Loss aversion; Prospect theory; QALY model; Utility of life duration;
    All these keywords.

    JEL classification:

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

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