IDEAS home Printed from https://ideas.repec.org/p/tut/cremwp/201330.html
   My bibliography  Save this paper

Source-Dependence of Utility and Loss Aversion: A Critical Test of Ambiguity Models

Author

Listed:
  • Mohammed Abdellaoui

    (HEC Paris and GREGHEC CNRS)

  • Han Bleichrodt

    (Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE), the Netherlands)

  • Olivier L'Haridon

    (CREM UMR CNRS 6211 and GREGHEC, University of Rennes 1, France)

  • Dennie Van Dolder

    (Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE))

Abstract

This paper tests whether utility is the same for risk and for uncertainty. This test is critical for models that capture ambiguity aversion through a difference in event weighting between risk and uncertainty, like the multiple priors models and prospect theory. We present a new method to measure utility and loss aversion under uncertainty without the need to introduce simplifying parametric assumptions. Our method extends Wakker and Deneffe’s (1996) trade‐off method by allowing for standard sequences that include gains, losses, and the reference point. It provides an efficient way to measure loss aversion and a useful tool for practical applications of ambiguity models. We could not reject the hypothesis that utility and loss aversion were the same for risk and uncertainty, suggesting that utility primarily reflects attitudes towards outcomes. Utility was S‐shaped, concave for gains and convex for losses and there was substantial loss aversion. Our findings support models that explain ambiguity aversion through a difference in event weighting and suggest that descriptive ambiguity models should allow for reference‐dependence of utility.

Suggested Citation

  • Mohammed Abdellaoui & Han Bleichrodt & Olivier L'Haridon & Dennie Van Dolder, 2013. "Source-Dependence of Utility and Loss Aversion: A Critical Test of Ambiguity Models," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201330, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  • Handle: RePEc:tut:cremwp:201330
    as

    Download full text from publisher

    File URL: https://crem-doc.univ-rennes1.fr/wp/2013/201330.pdf
    Download Restriction: no

    Citations

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


    Cited by:

    1. 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.
    2. Vieider, Ferdinand M. & Cingl, Lubomír & Martinsson, Peter & Stojic, Hrvoje, 2013. "Separating attitudes towards money from attitudes towards probabilities: Stake effects and ambiguity as a test for prospect theory," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2013-401, Social Science Research Center Berlin (WZB).
    3. Vieider, Ferdinand M. & Truong, Nghi & Martinsson, Peter & Pham Khanh Nam & Martinsson, Peter, 2013. "Risk preferences and development revisited: A field experiment in Vietnam," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2013-403, Social Science Research Center Berlin (WZB).

    More about this item

    Keywords

    prospect theory; loss aversion; utility for gains and losses; probability distortion; decision analysis; risk aversion;

    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:tut:cremwp:201330. 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: (CODA-POIREY Hélène). General contact details of provider: http://edirc.repec.org/data/crmrefr.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.

    We have no references for this item. You can help adding them by using 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.