Measuring loss aversion under ambiguity: a method to make prospect theory completely observable
We propose a simple, parameter-free method that, for the first time, makes it possible to completely observe Tversky and Kahneman’s (1992) prospect theory. While methods exist to measure event weighting and the utility for gains and losses separately, there was no method to measure loss aversion und...
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| Format: | Article |
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Springer
2016
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| Online Access: | https://eprints.nottingham.ac.uk/32927/ |
| _version_ | 1848794521262882816 |
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| author | Abdellaoui, Mohammed Bleichrodt, Han l'Haridon, Olivier van Dolder, Dennie |
| author_facet | Abdellaoui, Mohammed Bleichrodt, Han l'Haridon, Olivier van Dolder, Dennie |
| author_sort | Abdellaoui, Mohammed |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | We propose a simple, parameter-free method that, for the first time, makes it possible to completely observe Tversky and Kahneman’s (1992) prospect theory. While methods exist to measure event weighting and the utility for gains and losses separately, there was no method to measure loss aversion under ambiguity. Our method allows this and thereby it can measure prospect theory’s entire utility function. Consequently, we can properly identify properties of utility and perform new tests of prospect theory. We implemented our method in an experiment and obtained support for prospect theory. Utility was concave for gains and convex for losses and there was substantial loss aversion. Both utility and loss aversion were the same for risk and ambiguity, as assumed by prospect theory, and sign-comonotonic trade-off consistency, the central condition of prospect theory, held. |
| first_indexed | 2025-11-14T19:17:31Z |
| format | Article |
| id | nottingham-32927 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| last_indexed | 2025-11-14T19:17:31Z |
| publishDate | 2016 |
| publisher | Springer |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-329272020-05-04T17:28:26Z https://eprints.nottingham.ac.uk/32927/ Measuring loss aversion under ambiguity: a method to make prospect theory completely observable Abdellaoui, Mohammed Bleichrodt, Han l'Haridon, Olivier van Dolder, Dennie We propose a simple, parameter-free method that, for the first time, makes it possible to completely observe Tversky and Kahneman’s (1992) prospect theory. While methods exist to measure event weighting and the utility for gains and losses separately, there was no method to measure loss aversion under ambiguity. Our method allows this and thereby it can measure prospect theory’s entire utility function. Consequently, we can properly identify properties of utility and perform new tests of prospect theory. We implemented our method in an experiment and obtained support for prospect theory. Utility was concave for gains and convex for losses and there was substantial loss aversion. Both utility and loss aversion were the same for risk and ambiguity, as assumed by prospect theory, and sign-comonotonic trade-off consistency, the central condition of prospect theory, held. Springer 2016-02-01 Article PeerReviewed Abdellaoui, Mohammed, Bleichrodt, Han, l'Haridon, Olivier and van Dolder, Dennie (2016) Measuring loss aversion under ambiguity: a method to make prospect theory completely observable. Journal of Risk and Uncertainty, 52 (1). pp. 1-20. ISSN 1573-0476 Prospect theory ; Loss aversion ; Utility for gains and losses ; Risk ; Ambiguity ; Elicitation methods http://link.springer.com/article/10.1007%2Fs11166-016-9234-y doi:10.1007/s11166-016-9234-y doi:10.1007/s11166-016-9234-y |
| spellingShingle | Prospect theory ; Loss aversion ; Utility for gains and losses ; Risk ; Ambiguity ; Elicitation methods Abdellaoui, Mohammed Bleichrodt, Han l'Haridon, Olivier van Dolder, Dennie Measuring loss aversion under ambiguity: a method to make prospect theory completely observable |
| title | Measuring loss aversion under ambiguity: a method to make prospect theory completely observable |
| title_full | Measuring loss aversion under ambiguity: a method to make prospect theory completely observable |
| title_fullStr | Measuring loss aversion under ambiguity: a method to make prospect theory completely observable |
| title_full_unstemmed | Measuring loss aversion under ambiguity: a method to make prospect theory completely observable |
| title_short | Measuring loss aversion under ambiguity: a method to make prospect theory completely observable |
| title_sort | measuring loss aversion under ambiguity: a method to make prospect theory completely observable |
| topic | Prospect theory ; Loss aversion ; Utility for gains and losses ; Risk ; Ambiguity ; Elicitation methods |
| url | https://eprints.nottingham.ac.uk/32927/ https://eprints.nottingham.ac.uk/32927/ https://eprints.nottingham.ac.uk/32927/ |