Are People Really Risk Seeking for Losses?

Krzysztof Kontek ()

MPRA Paper from University Library of Munich, Germany

Abstract: This short paper demonstrates that the claim of Cumulative Prospect Theory (CPT) that people are risk seeking for loss prospects, which confirmed a hypothetical assumption of the earlier Prospect Theory (PT), appears to be merely a result of using a specific form of the probability weighting function to estimate the power factor of the value function. Using experimental data and the form of the probability weighting function presented by CPT gives a power factor for losses of less than 1. This would mean that people are risk seeking for loss prospects. However, once more flexible, two-parameter forms are used, the power factor takes on values between 1.04 and 1.10. This, however, makes the value function convex, which indicates risk aversion. It follows that people are generally risk averse both for gains and for losses. This contradicts one of the main theses of Prospect Theory.

Keywords: Prospect Theory; Value Function; Probability Weighting Function; Risk Attitude (search for similar items in EconPapers)
JEL-codes: C91 D03 D81 D87 (search for similar items in EconPapers)
Date: 2009-12-14
New Economics Papers: this item is included in nep-neu and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:19326

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