An Index of Loss Aversion
January 2005
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To a considerable extent, risk aversion as it is commonly observed is caused by loss aversion. Several indexes of loss aversion have been proposed in the literature. The one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components: basic utility, probability weighting, and loss aversion. The index is independent of the unit of payment. The main theorem shows how the indexes of different decision makers can be compared through observed choices.
Keywords
Classifications using
Journal of Economic Literature (JEL) Classification System
- C60 : Mathematical Methods and Programming: General
- D81 : Criteria for Decision-Making under Risk and Uncertainty
Automatically Extracted Terms
- loss aversion
- utility
- aversion
- theory
- prospect theory
- prospect
- risk aversion
- wakker / journal
- function
- reference point
- loss aversion index
- agent
- index
- probability weighting
- point
- wakker
- reference
- preference
- p t 2
- probability
