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

45 Pages Posted: 21 Apr 2009

See all articles by Adam S. Booij

Adam S. Booij

Amsterdam School of Economics

B.M.S. van Praag

University of Amsterdam - Faculty of Economics and Business (FEB); IZA Institute of Labor Economics; Tinbergen Institute in Amsterdam; CESifo (Center for Economic Studies and Ifo Institute)

Gijs van de Kuilen

Tilburg University

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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: loss aversion, utility for gains and losses, prospect theory, subjective probability weighting

JEL Classification: D81, C91, C93

Suggested Citation

Booij, Adam S. and van Praag, Bernard and van de Kuilen, Gijs, A Parametric Analysis of Prospect Theory's Functionals for the General Population. IZA Discussion Paper No. 4117. Available at SSRN: https://ssrn.com/abstract=1391789

Adam S. Booij (Contact Author)

Amsterdam School of Economics ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Bernard Van Praag

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
31 20 5256018 (Phone)
31 20 5256013 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Tinbergen Institute in Amsterdam

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Gijs Van de Kuilen

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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