A parametric analysis of prospect theory’s functionals for the general population

A.S. Booij, B.M.S. van Praag, G. van de Kuilen

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This article 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 = 1,935 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 weighting 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. In contrast to 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 toward the probability of obtaining the best possible outcome.
Original languageEnglish
Pages (from-to)115-148
JournalTheory and Decision
Volume68
Issue number1-2
Publication statusPublished - 2010

Fingerprint

weighting
pessimism
gender-specific factors
General population
experiment
Loss aversion
Probability weighting function
Experiments
evidence
Aversion
Coefficients
Gender differences
Expected utility
Risk attitude
Utility function
Psychological
Experiment
Pessimism
Probability weighting
Curvature

Cite this

@article{61043b0a33994283b977b87254adada8,
title = "A parametric analysis of prospect theory’s functionals for the general population",
abstract = "This article 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 = 1,935 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 weighting 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. In contrast to 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 toward the probability of obtaining the best possible outcome.",
author = "A.S. Booij and {van Praag}, B.M.S. and {van de Kuilen}, G.",
year = "2010",
language = "English",
volume = "68",
pages = "115--148",
journal = "Theory and Decision",
issn = "0040-5833",
publisher = "Springer",
number = "1-2",

}

A parametric analysis of prospect theory’s functionals for the general population. / Booij, A.S.; van Praag, B.M.S.; van de Kuilen, G.

In: Theory and Decision, Vol. 68, No. 1-2, 2010, p. 115-148.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - A parametric analysis of prospect theory’s functionals for the general population

AU - Booij, A.S.

AU - van Praag, B.M.S.

AU - van de Kuilen, G.

PY - 2010

Y1 - 2010

N2 - This article 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 = 1,935 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 weighting 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. In contrast to 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 toward the probability of obtaining the best possible outcome.

AB - This article 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 = 1,935 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 weighting 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. In contrast to 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 toward the probability of obtaining the best possible outcome.

M3 - Article

VL - 68

SP - 115

EP - 148

JO - Theory and Decision

JF - Theory and Decision

SN - 0040-5833

IS - 1-2

ER -