A tractable method to measure utility and loss aversion under prospect theory |
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| Authors: | Mohammed Abdellaoui Han Bleichrodt Olivier L’Haridon |
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| Affiliation: | (1) HEC-Paris, GREG-HEC, 1 rue de la Libération, 78351 Jouy-en-Josas, Paris, France;(2) Department of Economics, Erasmus University, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands;(3) GREG-HEC and University Paris Sorbonne, HEC-Paris, 1 rue de la Libération, 78351 Jouy-en-Josas, Paris, France |
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| Abstract: | This paper provides an efficient method to measure utility under prospect theory. Our method minimizes both the number of elicitations required to measure utility and the cognitive burden for subjects, being based on the elicitation of certainty equivalents for two-outcome prospects. We applied our method in an experiment and were able to replicate the main findings on prospect theory, suggesting that our method measures what it is intended to. Our data confirmed empirically that risk seeking and concave utility can coincide under prospect theory. Utility did not depend on the probability used in the elicitation, which offers support for the validity of prospect theory. |
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| Keywords: | Prospect theory Utility measurement Loss aversion |
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