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Risk behavior for gain, loss, and mixed prospects. (English) Zbl 1303.91061

Summary: This study extends experimental tests of (cumulative) prospect theory (PT) over prospects with more than three outcomes and tests second-order stochastic dominance principles [M. Levy and H. Levy, Manage. Sci. 48, No. 10, 1334–1349 (2002; Zbl 1232.91222); M. Baucells and F. H. Heukamp, “Stochastic dominance and cumulative prospect theory”, Manage. Sci. 52, No. 9, 1409–1423 (2006; doi:10.1287/mnsc.1060.0537)]. It considers choice behavior of people facing prospects of three different types: gain prospects (losing is not possible), loss prospects (gaining is not possible), and mixed prospects (both gaining and losing are possible). The data supports the distinction of risk behavior into these three categories of prospects, Further, probability weighting and diminishing sensitivity of utility as predicted by PT are observed. Loss aversion is, however, less pronounced, except for choices where one prospect is degenerate. The data suggests that the probability of losing may be relevant for loss aversion.

MSC:

91B06 Decision theory
91B16 Utility theory
91A90 Experimental studies

Citations:

Zbl 1232.91222
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Full Text: DOI

References:

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