A quantification of prospect theory in the health domain

Arthur Attema, Werner Brouwer and Olivier L'Haridon

Economics Working Paper Archive (University of Rennes & University of Caen) from Center for Research in Economics and Management (CREM), University of Rennes, University of Caen and CNRS

Abstract: It is well-known that expected utility (EU) has empirical deficiencies. Prospect theory (PT) has developed as an alternative with more descriptive validity. However, PT’s full function had not yet been quantified in the health domain. This paper is therefore the first to simultaneously measure utility of life duration, probability weighting, and loss aversion in the health domain. We observe loss aversion and risk aversion for gains and losses, which for gains can be explained by probabilistic pessimism. Utility for gains is almost linear. For losses, we find less weighting of probability 1/2 and concave utility. This contrasts with the common finding of convex utility for monetary losses. However, PT was proposed to explain choices among lotteries involving small outcomes. Life years are arguably not ‘small’ and need not generate convex utility for losses. Moreover, utility of life duration reflects discounting, causing concave utility. These results are a first step in fitting non-EU models for health-related decisions.

Keywords: prospect theory; life duration; QALY (search for similar items in EconPapers)
JEL-codes: D90 (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-hea and nep-upt
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Citations: View citations in EconPapers (47)

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