Understanding the Two Components of Risk Attitudes: An Experimental Analysis

Jianying Qiu and Eva-Maria Steiger ()

No 2010-053, Jena Economic Research Papers from Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics

Abstract: Cumulative Prospect Theory (PT) introduced the weighting of probabilities as an additional component to capture risk attitudes. However, this addition would be a less significant challenge to expected utility theory (EU) if utility curvature and probability weighting showed strong positive correlation. In that case the utility curvature in EU alone, while not properly describing risky behavior in general, would still capture most of the variance of individual risk aversion. This study provides experimental evidence that such a strong and positive correlation does not exist. Although most individuals exhibit concave utility and convex probability weighting, the two components show no strong positive correlation.

Keywords: risk attitudes; cumulative prospect theory; experimental study (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
Date: 2010-08-24
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Related works:
Journal Article: Understanding the Two Components of Risk Attitudes: An Experimental Analysis (2011)
Working Paper: Understanding the Two Components of Risk Attitudes: An Experimental Analysis (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:jrp:jrpwrp:2010-053

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