Measuring loss aversion under ambiguity: a method to make prospect theory completely observable

Abdellaoui, Mohammed; Bleichrodt, Han; l'Haridon, Olivier; van Dolder, Dennie

Abstract

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.

Citation

Abdellaoui, M., Bleichrodt, H., l'Haridon, O., & van Dolder, D. (2016). Measuring loss aversion under ambiguity: a method to make prospect theory completely observable. Journal of Risk and Uncertainty, 52(1), 1-20. https://doi.org/10.1007/s11166-016-9234-y

• Journal Article Type: Article
• Acceptance Date: Dec 8, 2015
• Online Publication Date: Mar 19, 2016
• Publication Date: Feb 1, 2016
• Deposit Date: Apr 28, 2016
• Publicly Available Date: Apr 28, 2016
• Journal: Journal of Risk and Uncertainty
• Print ISSN: 0895-5646
• Electronic ISSN: 1573-0476
• Publisher: Springer Verlag
• Peer Reviewed: Peer Reviewed
• Volume: 52
• Issue: 1
• Pages: 1-20
• DOI: https://doi.org/10.1007/s11166-016-9234-y
• Keywords: Prospect theory ; Loss aversion ; Utility for gains and losses ; Risk ; Ambiguity ; Elicitation methods
• Public URL: https://nottingham-repository.worktribe.com/output/770448
• Publisher URL: http://link.springer.com/article/10.1007%2Fs11166-016-9234-y
• Additional Information: The final publication is available at Springer via http://dx.doi.org/10.1007/s11166-016-9234-y
• Contract Date: Apr 28, 2016