An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and Expected Utility Theory

Hui-Kuan Chung, Paul Glimcher and Agnieszka Tymula

American Economic Journal: Microeconomics, 2019, vol. 11, issue 3, 34-67

Abstract: Prospect theory, used descriptively for decisions under both risk and certainty, presumes concave utility over gains and convex utility over losses, a pattern widely seen in lottery tasks. Although such discontinuous gain-loss reference-dependence is also used to model riskless choices, only limited empirical evidence supports this use. In incentive-compatible experiments, we find that gain-loss reflection effects are not observed under riskless choice as predicted by prospect theory, even while in the same subjects gain-loss reflection effects are observed under risk. Our empirical results challenge the application of choice models across both risky and riskless domains.

JEL-codes: C91 D12 D81 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mic.20170112
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Citations: View citations in EconPapers (4)

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