Additive utility in prospect theory
May 2009
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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.
- prospect
- attribute-speci fic evaluation
- utility
- function
- theory
- outcome
- evaluation
- decision
- weighting functions
- weighting
- prospect theory
- preference
- trade-off
- attribute-speci
- 1/2
- attribute
- state
- loss aversion
- additive utility
- reference point
