Prospect Theory in Choice and Pricing Tasks

William Harbaugh (), Kate Krause () and Lise Vesterlund

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

Abstract: The most distinctive prediction of prospect theory is the fourfold pattern (FFP) of risk attitudes. People are said to be (1) risk-seeking over low-probability gains, (2) risk-averse over low-probability losses, (3) risk-averse over high-probability gains, and (4) risk-seeking over high-probability losses. Using simple gambles over real payoffs, we conduct a direct test of this FFP prediction. We find that when pricing gambles subjects’ risk attitudes are consistent with the FFP. However, when they choose between the gamble and its expected value, their decisions are not distinguishable from random choice and are often the exact opposite of the prediction. These results hold both between and within subjects, and are robust even when we allow the subjects to simultaneously review and change their price and choice decisions.

Keywords: probability weighting; expected utility; prospect theory; cumulative prospect theory; preference reversal (search for similar items in EconPapers)
JEL-codes: D80 (search for similar items in EconPapers)
Pages: 27
Date: 2002-07-20, Revised 2007-08-20
New Economics Papers: this item is included in nep-cbe and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ore:uoecwp:2002-02

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