EconPapers    
Economics at your fingertips  
 

Empirical evaluation of third-generation prospect theory

Michael H. Birnbaum ()
Additional contact information
Michael H. Birnbaum: California State University, Fullerton

Theory and Decision, 2018, vol. 84, issue 1, 11-27

Abstract: Abstract Third generation prospect theory (Schmidt et al. J Risk Uncertain 36:203–223, 2008) is a theory of choices and of judgments of highest buying and lowest selling prices of risky prospects, i.e., of willingness to pay (WTP) and willingness to accept (WTA). The gap between WTP and WTA is sometimes called the “endowment effect” and was previously called the “point of view” effect. Third generation prospect theory (TGPT) combines cumulative prospect theory for risky prospects with the theory that judged values are based on the integration of price paid or price received with the consequences of gambles. In TGPT, the discrepancy between WTP and WTA is due to loss aversion-losses have greater absolute utility than gains of the same value. TGPT was developed independently of similar developments by Birnbaum and Zimmermann (Organ Behav Hum Decis Process 74(2):145–187, 1998) and Luce (Utility of gains and losses: measurement-theoretical and experimental approaches. Erlbaum, Mahwah, 2000). This paper reviews theoretical and empirical findings, to show that TGPT fails as a descriptive model of both choices and judgments. Evidence refutes three implications of TGPT, but they are consistent with configural weight models (Birnbaum and Stegner, J Personal Soc Psychol 37:48–74, 1979) in which loss aversion is not needed to describe the results. In the configural weight models, buyers place greater weight on lower consequences, attributes or estimates of value compared to sellers, who place greater configural weight on higher aspects of an object or prospect.

Keywords: Cumulative prospect theory; Endowment effect; Loss aversion; Prospect theory; Configural weighting; Willingness to pay (WTP); Willingness to accept (WTA) (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://link.springer.com/10.1007/s11238-017-9607-y Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:theord:v:84:y:2018:i:1:d:10.1007_s11238-017-9607-y

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/11238/PS2

Access Statistics for this article

Theory and Decision is currently edited by Mohammed Abdellaoui

More articles in Theory and Decision from Springer
Bibliographic data for series maintained by Sonal Shukla ().

 
Page updated 2019-11-06
Handle: RePEc:kap:theord:v:84:y:2018:i:1:d:10.1007_s11238-017-9607-y