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

Mohammed Abdellaoui, Han Bleichrodt, Olivier l’Haridon and Dennie van Dolder
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Han Bleichrodt: Erasmus School of Economics - Erasmus University Rotterdam, Department of Applied Economics - Erasmus University Rotterdam
Olivier l’Haridon: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, CREM - Centre de Recherche en Economie et Management - UNICAEN - Université Caen Normandie - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique

Authors registered in the RePEc Author Service: Olivier l'Haridon

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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: elicitation methods; risk; ambiguity; prospect theory; loss aversion; utility for gains and losses (search for similar items in EconPapers)
Date: 2016
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01242616
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Published in Journal of Risk and Uncertainty, Springer Verlag, 2016, 52 (1), pp.1-20. <10.1007/s11166-016-9234-y>

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