Making Everyone’s Preferences Count: A Prospect Theory Approach to Valuing Health Improvements

Karen Mulligan, Drishti Baid, Jason Doctor and Darius Lakdawalla

No 35666, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Health technology assessment bodies and policymakers have grappled with the issue of whose preferences – the general healthy population or the patient population – should be incorporated into traditional cost-effectiveness analysis. This debate arises because healthy individuals and patients often value the same health state differently, and cost-effectiveness will undervalue health-related quality of life (HRQoL) for individuals with chronic illness or disability because it cannot account for adaptation. Prospect theory (PT) provides a framework that permits adaptation since it assumes individuals evaluate outcomes relative to a reference point. We estimate utility over HRQoL in a PT framework in a nationally representative U.S. population and compare directly with utility estimates in an EU framework from the same population. Consistent with previous studies in the monetary and health domains, we find evidence of probability weighting bias and loss aversion over health. Using the PT utility estimates, we demonstrate how PT can be incorporated into healthcare value assessment and present the resulting implications for medical decision making.

JEL-codes: D9 I1 I3 (search for similar items in EconPapers)
Date: 2026-08
Note: EH
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