Journal Article

Loss Aversion Under Prospect Theory: A Parameter-Free Measurement

Bleichrodt, Han, Abdellaoui, Mohammed, Paraschiv, Corina

2007

Overview

Agrowing body of qualitative evidence shows that loss aversion, a phenomenon formalized in prospect theory, can explain a variety of field and experimental data. Quantifications of loss aversion are, however, hindered by the absence of a general preference-based method to elicit the utility for gains and losses simultaneously. This paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions. Thus, it is the first to obtain a parameter-free elicitation of prospect theory's utility function on the whole domain. Our method also provides an efficient way to elicit utility midpoints, which are important in axiomatizations of utility. Several definitions of loss aversion have been put forward in the literature. According to most definitions we find strong evidence of loss aversion, at both the aggregate and the individual level. The degree of loss aversion varies with the definition used, which underlines the need for a commonly accepted definition of loss aversion.

• Publisher: INFORMS,Institute for Operations Research and the Management Sciences
• Subject: Ambivalence / Applied sciences / Business management / Business studies / Decision theory. Utility theory / domain_shs.eco.eco / Economics and Finance / Elicitation / elicitation of midpoints / Empirical evidence / Evaluation / Exact sciences and technology / Expected utility / Financial loss / Financial management / Humanities and Social Sciences / Loss aversion / Losses / Management science / Mathematical statistics / Measurement / Operational research and scientific management / Operational research. Management science / Parameter identification / Prospect theory / Risk aversion / Statistical median / Statistics / Studies / Term weighting / Theory / utility for gains and losses / Utility functions / Utility theory