Cumulative prospect theory's functional menagerie

Stott, Henry

doi:10.1007/s11166-006-8289-6

Cited by 429 publications

(411 citation statements)

References 81 publications

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“…For losses, however, the reliabilities were similar for the second and third iteration. These reliabilities are comparable to those of earlier studies (Abdellaoui et al, 2008;Stott, 2006).…”

Section: Reliabilitysupporting

confidence: 89%

Prospect theory in the health domain: A quantitative assessment

Attema

Brouwer

l’Haridon

2013

Journal of Health Economics

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1 We are grateful to Laurens Niëns and Matthijs Versteegh for advice on the experimental design. Mohammed Abdellaoui, Aurélien Baillon, Han Bleichrodt and Peter Wakker gave helpful comments on a previous version of this manuscript. The usual disclaimer applies. ABSTRACTIt 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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Section: Reliabilitysupporting

confidence: 89%

Prospect theory in the health domain: A quantitative assessment

Attema

Brouwer

l’Haridon

2013

Journal of Health Economics

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“…which can be conveniently interpreted and has turned out to be the best compromise between parsimony and goodness of fit in the context of prospect theory (Stott, 2006). 6…”

Section: Econometric Modelmentioning

confidence: 99%

Risk and Rationality: Uncovering Heterogeneity in Probability Distortion

2009

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It has long been recognized that there is considerable heterogeneity in individual risk taking behavior but little is known about the distribution of risk taking types. We present a parsimonious characterization of risk taking behavior by estimating a finite mixture regression model for three different experimental data sets, two Swiss and one Chinese, over a large number of real gains and losses. We find two distinct types of individuals: In all three data sets, the choices of roughly 80% of the subjects exhibit significant deviations from linear probability weighting, consistent with prospect theory. 20% of the subjects weight probabilities near linearly and behave essentially as expected value maximizers. Moreover, individuals are cleanly assigned to one type with probabilities close to unity. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling.

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“…Several parametric functions have been proposed to describe the probably weighting function (see Stott 2006 for an overview). The most commonly used specification is the linear-in-log-odds specification, introduced by Goldstein and Einhorn (1987) (GE-87), and given by:…”

Section: Parametric Specificationsmentioning

confidence: 99%

“…The correlation then becomes: corr ε o+ 1,n , ε o+ 2,n = cov ε o+ 1,n , ε o+ 2,n var ε o+ 1,n · var ε o+ 2,n = −σ 2 2σ 2 · 2σ 2 = − 1 2 . 7 In the context of discrete choice, Stott (2006) shows that the more parsimonious one-parameter specifications often provide a sufficient fit in terms of the Akaike information criterion. …”

Section: The Econometric Modelmentioning

confidence: 99%

A parametric analysis of prospect theory’s functionals for the general population

2009

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This article presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1,935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss-aversion coefficient of 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighting functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. In contrast to previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response toward the probability of obtaining the best possible outcome.

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Cumulative prospect theory's functional menagerie

Cited by 429 publications

References 81 publications

Prospect theory in the health domain: A quantitative assessment

Prospect theory in the health domain: A quantitative assessment

Risk and Rationality: Uncovering Heterogeneity in Probability Distortion

A parametric analysis of prospect theory’s functionals for the general population

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