Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/279241 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10491
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Loss aversion, risk aversion, and the probability weighting function (PWF) are three central concepts in explaining decisionmaking under risk. I examine interlinkages between these concepts in a model of decisionmaking that allows for loss averse/tolerant stochastic reference dependence and optimism/pessimism over probability distributions. I give a preference interpretation to commonly observed shapes of PWF and to risk aversion. In particular, I establish a connection between loss aversion and both risk aversion and the inverse-S PWF: loss aversion is a necessary condition to observe each of these phenomena. The results extend to distinct PWFs in the gain and loss domains, as under prospect theory.
Subjects: 
probability weighting
rank dependent expected utility
loss aversion
risk aversion
reference dependence
optimism
pessimism
prospect theory
JEL: 
D91
D81
D01
Document Type: 
Working Paper
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