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Risk Aversion in Cumulative Prospect Theory

Ulrich Schmidt and Horst Zank ()
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Horst Zank: Department of Economics, School of Social Sciences, University of Manchester, Manchester M13 9PL, United Kingdom

Management Science, 2008, vol. 54, issue 1, 208-216

Abstract: This paper characterizes the conditions for strong risk aversion and second-order stochastic dominance for cumulative prospect theory. Strong risk aversion implies a convex weighting function for gains and a concave one for losses. It does not necessarily imply a concave utility function. The latter does follow if the weighting functions are continuous. By investigating the exact relationship between loss aversion and strong risk aversion, a natural index for the degree of loss aversion is derived.

Keywords: cumulative prospect theory; loss aversion; risk aversion; second-order stochastic dominance; decision analysis theory; risk (search for similar items in EconPapers)
Date: 2008
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http://dx.doi.org/10.1287/mnsc.1070.0762 (application/pdf)

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Working Paper: Risk Aversion in Cumulative Prospect Theory (2002) Downloads
Working Paper: Risk Aversion in Cumulative Prospect Theory (2002) Downloads
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