A Tractable Method to Measure Utility and Loss Aversion under Prospect Theory
This paper provides an efficient method to measure utility under prospect theory, the most important descriptive theory of decision under uncertainty today. Our method is based on the elicitation of certainty equivalents for two-outcome prospects, a common way to measure utility. We applied our method in an experiment and found that most subjects were risk averse for gains and risk seeking for losses but had concave utility both for gains and for losses. This finding illustrates empirically that risk seeking and concave utility can coincide under prospect theory, a result that was derived theoretically by Chateauneuf and Cohen (1994). Utility was steeper for losses than for gains, which is consistent with loss aversion. Utility did not depend on the probability used in the elicitation, which offers support for prospect theory.
|loss aversion, prospect theory, utility measurement|
|Organisation||Erasmus School of Economics|
Abdellaoui, M, Bleichrodt, H, & L'Haridon, O. (2007). A Tractable Method to Measure Utility and Loss Aversion under Prospect Theory. Retrieved from http://hdl.handle.net/1765/11075