The empirical adequacy of cumulative prospect theory and its implications for normative assessment

Glenn Harrison and Don Ross ()

Journal of Economic Methodology, 2017, vol. 24, issue 2, 150-165

Abstract: Much behavioral welfare economics assumes that expected utility theory (EUT) does not accurately describe most human choice under risk. A substantial literature instead evaluates welfare consequences by taking cumulative prospect theory (CPT) as the natural default alternative, at least where description is concerned. We present evidence, based on a review of previous literature and new experimental data, that the most empirically adequate hypothesis about human choice under risk is that it is heterogeneous, and that where EUT does not apply, more choice is characterized by rank-dependent utility models than by CPT. Most of the apparently loss-averse choice behavior results from probability weighting rather than from direct disutility experienced when an outcome is framed as a loss against an idiosyncratic reference point. We then consider implications of this finding for methodological debates about how to model welfare effects of policies, and argue that abandonment of a dogmatic belief in CPT as the correct theory of risk human choice exposes a conceptual error that is widespread in behavioral welfare economics. We provide concluding reflections on second-order, philosophical issues around the grounding of normative commitments in policy-focused economics.

Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://hdl.handle.net/10.1080/1350178X.2017.1309753 (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:taf:jecmet:v:24:y:2017:i:2:p:150-165

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RJEC20

DOI: 10.1080/1350178X.2017.1309753

Access Statistics for this article

Journal of Economic Methodology is currently edited by John Davis and D Wade Hands

More articles in Journal of Economic Methodology from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().