A Parametric Analysis of Prospect Theory's Functionals for the General Population

Adam S. Booij (), Bernard van Praag and Gijs Kuilen
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Adam S. Booij: University of Amsterdam

No 4117, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss aversion coefficient of 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighing functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. Unlike previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response towards the probability of obtaining the best possible outcome.

Keywords: prospect theory; utility for gains and losses; loss aversion; subjective probability weighting (search for similar items in EconPapers)
JEL-codes: C91 C93 D81 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2009-04
New Economics Papers: this item is included in nep-cbe and nep-upt
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Citations: View citations in EconPapers (28)

Published - published in: Theory and Decision, 2010, 68, 115–148

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Related works:
Journal Article: A parametric analysis of prospect theory’s functionals for the general population (2010)
Working Paper: A Parametric Analysis of Prospect Theory's Functionals for the General Population (2009)
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