Exchange Economies and Loss Exposure: Experiments Exploring Prospect Theory and Competitive Equilibria in Market Environments

Posted: 18 May 1998

See all articles by Mikhail Myagkov

Mikhail Myagkov

University of Oregon - Department of Political Science

Charles R. Plott

California Institute of Technology - Division of the Humanities and Social Sciences

Abstract

Exchange economies were created in which individuals faced losses. If people are risk seeking in the losses, as predicted by prospect theory, then due to the nonconvexity, the competitive equilibria are all on the boundaries of the Edgeworth Box. The experimental results are that risk-seeking behavior is observed in many people and appears in markets as predicted. In addition, market behavior is consistent with answers to hypothetical questionnaires. Contrary to prospect theory, risk seeking seems to diminish with experience; preferences in the market setting are not labile; and risk-seeking preferences are not simply a result of framing effects.

JEL Classification: C91, C92, D50, D80

Suggested Citation

Myagkov, Mikhail and Plott, Charles R., Exchange Economies and Loss Exposure: Experiments Exploring Prospect Theory and Competitive Equilibria in Market Environments. The American Economic Review (December 1997). Available at SSRN: https://ssrn.com/abstract=89188

Mikhail Myagkov

University of Oregon - Department of Political Science ( email )

Eugene, OR 97403
United States

Charles R. Plott (Contact Author)

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
337 Baxter Hall
Pasadena, CA 91125
United States
626-395-4209 (Phone)

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