Relating the two Dimensions of Risk Attitudes: An Experimental Analysis

Jianying Qiu and Eva Maria Berger Steiger

No 2009-006, Jena Economics Research Papers from Friedrich-Schiller-University Jena

Abstract: In the framework of expected utility theory, risk attitudes are entirely captured by the curvature of the utility function. In cumulative prospect theory (CPT) risk attitudes have an additional dimension: the weighting of probabilities. With this modification, one question arises naturally: since both utility and probability weighting determine the attitude towards risk, what is the relation between them? We ran a controlled laboratory experiment to answer this question. Our ï¬ ndings suggest that the two dimensions capture different characteristics of individual risk attitude. Though individuals who are risk averse in one dimension are likely to be risk averse in the other, the two dimensions show no signiï¬ cant correlation. Moreover, a signiï¬ cant proportion of subjects are risk averse in one dimension but risk seeking in the other.

Keywords: Risk attitudes; Cumulative prospect theory; Experimental study (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
Date: 2009-01-30
New Economics Papers: this item is included in nep-exp and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:jrp:jrpwrp:2009-006

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