Measuring Loss Aversion under Ambiguity: A Method to Make Prospect Theory Completely Observable

24 Pages Posted: 31 Aug 2013 Last revised: 28 Apr 2016

See all articles by Mohammed Abdellaoui

Mohammed Abdellaoui

HEC Paris - Economics & Decision Sciences

Han Bleichrodt

Erasmus University Rotterdam (EUR) - Institute of Health Policy and Management

Olivier l'Haridon

Ecole Normale Superieure de Cachan - Group of research on the Risk, Information and the Decision (GRID); Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA)

Dennie van Dolder

VU Amsterdam - School of Business and Economics; Centre for Decision Research and Experimental Economics (CeDEx) - University of Nottingham

Date Written: March 19, 2016

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 existed 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. 

Keywords: prospect theory; loss aversion; utility for gains and losses; risk; ambiguity; elicitation methods

JEL Classification: C91, D03, D81

Suggested Citation

Abdellaoui, Mohammed and Bleichrodt, Han and L'Haridon, Olivier and van Dolder, Dennie, Measuring Loss Aversion under Ambiguity: A Method to Make Prospect Theory Completely Observable (March 19, 2016). Journal of Risk and Uncertainty, Vol. 52, No. 1, pp. 1-20, February 2016. Available at SSRN: https://ssrn.com/abstract=2318352 or http://dx.doi.org/10.2139/ssrn.2318352

Mohammed Abdellaoui (Contact Author)

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

Han Bleichrodt

Erasmus University Rotterdam (EUR) - Institute of Health Policy and Management ( email )

Netherlands

Olivier L'Haridon

Ecole Normale Superieure de Cachan - Group of research on the Risk, Information and the Decision (GRID) ( email )

61 Avenue du President Wilson
94235 Cachan
France

Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA)

106-112 Boulevard de l'Hopital
Paris Cedex 13, 75647
France

Dennie Van Dolder

VU Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Centre for Decision Research and Experimental Economics (CeDEx) - University of Nottingham ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
270
rank
105,369
Abstract Views
1,436
PlumX