A simple non-parametric method for eliciting prospect theory's value function and measuring loss aversion under risk and ambiguity

Pavlo Blavatskyy ()
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Pavlo Blavatskyy: Montpellier Business School

Theory and Decision, 2021, vol. 91, issue 3, No 6, 403-416

Abstract: Abstract Prospect theory emerged as one of the leading descriptive decision theories that can rationalize a large body of behavioral regularities. The methods for eliciting prospect theory parameters, such as its value function and probability weighting, are invaluable tools in decision analysis. This paper presents a new simple method for eliciting prospect theory’s value function without any auxiliary/simplifying parametric assumptions. The method is applicable both to choice under ambiguity (Knightian uncertainty) and risk (when events are characterized by objective probabilities). Our new elicitation method is implemented in a simple paper-and-pencil experiment (via an iterative multiple price list format). This is one of the first experiments that elicits non-parametric prospect theory’s value function with salient rewards. The collected data generally confirm findings in the existing literature: the value function is S-shaped (concave in the gain domain and convex in the loss domain) though there is a weaker loss aversion on the aggregate level and a substantial heterogeneity in loss aversion on the individual level (41% loss averse, 6% loss neutral and 53% gain seeking).

Keywords: Risk; Ambiguity; Prospect theory; Value function; Loss aversion (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:theord:v:91:y:2021:i:3:d:10.1007_s11238-021-09811-6

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DOI: 10.1007/s11238-021-09811-6

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