Global Shapes of Preference Scaling Functions

Kavitha Ranganathan and Srinivas Prakhya
Additional contact information
Kavitha Ranganathan: Kavitha Ranganathan, School for Securities Information and Research (SSIR), National Institute of Securities Markets (NISM), NISM Bhavan, Plot No. 82, Sector 17, Vashi, Navi Mumbai - 400 703. E-mail: kavitha.ranganathan@nism.ac.in
Srinivas Prakhya: Srinivas Prakhya, Associate Professor, Marketing, Indian Institute of Management, Bangalore (IIMB), Bannerghatta Road, Bangalore - 560 076 Phone Number: +91-80-26993186, Fax Number: +91-80-26584050 E-mail: sprakhya@iimb.ernet.in

Journal of Interdisciplinary Economics, 2012, vol. 24, issue 2, 145-172

Abstract: In the expected utility framework, concavity (or convexity) of the preference scaling function corresponds to risk-aversion (or risk-seeking) preferences. Friedman and Savage ( 1948 ) and Markowitz ( 1952 ) indicate that individuals may be risk-averse at some wealth levels but risk-seeking at others. Prospect theory ( Kahneman & Tversky, 1979 ) proposes an S-shaped utility function exhibiting risk-aversion in the domain of gain and risk-seeking in the loss domain. In this study, we use lottery experiments to infer global shapes of the preference scaling functions that determine risk attitudes in interaction with uncertainty. The global shapes that emerge are—fully concave, fully convex, linear, Reverse-S and S-shaped preference scaling functions. Using annual income as a proxy for wealth, we examine the relationship between global shapes and wealth. The data largely supports the Friedman–Savage hypothesis; we find that at low levels of wealth people are concave, followed by Reverse-S and then a second upper concave segment at higher levels of wealth. JEL: C91, D81

Keywords: Experiments; decision making under risk and uncertainty; risk attitudes; individual behaviour (search for similar items in EconPapers)
Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://jie.sagepub.com/content/24/2/145.abstract (text/html)

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:sae:jinter:v:24:y:2012:i:2:p:145-172

Access Statistics for this article

More articles in Journal of Interdisciplinary Economics
Bibliographic data for series maintained by SAGE Publications ().