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Understanding the Two Components of Risk Attitudes: An Experimental Analysis

Jianying Qiu and Eva Maria Berger Steiger ()

No 2009-088, Jena Economics Research Papers from Friedrich-Schiller-University Jena

Abstract: Economics and management science share the tradition of ordering risk aversion by ï¬ tting the best expected utility (EU) model with a certain utility function to individual data, and then using the utility curvature for each individual as the sole index of risk attitude. (Cumulative) Prospect theory (CPT) has demonstrated various empirical deï¬ ciencies of EU and introduced the weighting of probabilities as an additional component to capture risk attitude. However, if utility curvature and probability weighting were strongly correlated, the utility curvature in EU alone, while not properly describing risky behavior in general, would still capture most of the variance regarding degrees of risk aversion. This study shows, however, that such a strong correlation does not exist. Though, most individuals exhibit concave utility and convex probability weighting, the two components show no correlation. Thus neglecting one component entails a loss.

Keywords: risk attitudes; cumulative prospect theory; experimental study (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
Date: 2009-11-02
New Economics Papers: this item is included in nep-cbe, nep-neu and nep-upt
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Related works:
Journal Article: Understanding the Two Components of Risk Attitudes: An Experimental Analysis (2011) Downloads
Working Paper: Understanding the Two Components of Risk Attitudes: An Experimental Analysis (2010) Downloads
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