Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and Expected Utility Theory†

An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and... AbstractProspect theory, used descriptively for decisions under both risk and certainty, presumes concave utility over gains and convex utility over losses; a pattern widely seen in lottery tasks. Although such discontinuous gain-loss reference-dependence is also used to model riskless choices, only limited empirical evidence supports this use. In incentive-compatible experiments, we find that gain-loss reflection effects are not observed under riskless choice as predicted by prospect theory, even while in the same subjects gain-loss reflection effects are observed under risk. Our empirical results challenge the application of choice models across both risky and riskless domains. (JEL C91, D12, D81) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and Expected Utility Theory†

Loading next page...
 
/lp/american-economic-association/an-experimental-comparison-of-risky-and-riskless-choice-limitations-of-ciIE240q06
Publisher
American Economic Association
Copyright
Copyright © 2019 © American Economic Association
ISSN
1945-7685
DOI
10.1257/mic.20170112
Publisher site
See Article on Publisher Site

Abstract

AbstractProspect theory, used descriptively for decisions under both risk and certainty, presumes concave utility over gains and convex utility over losses; a pattern widely seen in lottery tasks. Although such discontinuous gain-loss reference-dependence is also used to model riskless choices, only limited empirical evidence supports this use. In incentive-compatible experiments, we find that gain-loss reflection effects are not observed under riskless choice as predicted by prospect theory, even while in the same subjects gain-loss reflection effects are observed under risk. Our empirical results challenge the application of choice models across both risky and riskless domains. (JEL C91, D12, D81)

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: Aug 1, 2019

There are no references for this article.