Averting risk in the face of large losses: Bernoulli vs. Tversky and Kahneman

Antoni Bosch-Domènech and Joaquim Silvestre

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We experimentally question the assertion of Prospect Theory that people display risk attraction in choices involving high-probability losses. Indeed, our experimental participants tend to avoid fair risks for large (up to € 90), high-probability (80%) losses. Our research hinges on a novel experimental method designed to alleviate the house-money bias that pervades experiments with real (not hypothetical) loses. Our results vindicate Daniel Bernoulli’s view that risk aversion is the dominant attitude, But, contrary to the Bernoulli-inspired canonical expected utility theory, we do find frequent risk attraction for small amounts of money at stake. In any event, we attempt neither to test expected utility versus nonexpected utility theories, nor to contribute to the important literature that estimates value and weighting functions. The question that we ask is more basic, namely: do people display risk aversion when facing large losses, or large gains? And, at the risk of oversimplifying, our answer is yes.

Keywords: Losses; Risk Attraction; Risk Aversion; Experiments; Prospect Theory; Bernoulli; Kahneman; Tversky; Leex (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-exp, nep-fmk and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Journal Article: Averting risk in the face of large losses: Bernoulli vs. Tversky and Kahneman (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:932

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