Additive utility in prospect theory
Prospect theory is currently the main descriptive theory of decision under uncertainty. It generalizes expected utility by introducing nonlinear decision weighting and loss aversion. A difficulty in the study of multiattribute utility under prospect theory is to determine when an attribute yields a gain or a loss. One possibility, adopted in the theoretical literature on multiattribute utility under prospect theory, is to assume that a decision maker determines whether the complete outcome is a gain or a loss. In this holistic evaluation, decision weighting and loss aversion are general and attribute-independent. Another possibility, more common in the empirical literature, is to assume that a decision maker has a reference point for each attribute. We give preference foundations for this attribute-specific evaluation where decision weighting and loss aversion are depending on the attributes.
|Keywords||Additive utility, Decision weighting, Loss aversion, Prospect theory|
|Persistent URL||dx.doi.org/10.1287/mnsc.1080.0978, hdl.handle.net/1765/26889|
Bleichrodt, H, Schmidt, U, & Zank, H. (2009). Additive utility in prospect theory. Management Science, 55(5), 863–873. doi:10.1287/mnsc.1080.0978