Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/32625
Year of Publication: 
2009
Series/Report no.: 
Jena Economic Research Papers No. 2009,088
Publisher: 
Friedrich Schiller University Jena and Max Planck Institute of Economics, Jena
Abstract: 
Economics and management science share the tradition of ordering risk aversion by fitting the best expected utility (EU) model with a certain utility function to individual data, and then using the utility curvature for each individual as the sole index of risk attitude. (Cumulative) Prospect theory (CPT) has demonstrated various empirical deficiencies of EU and introduced the weighting of probabilities as an additional component to capture risk attitude. However, if utility curvature and probability weighting were strongly correlated, the utility curvature in EU alone, while not properly describing risky behavior in general, would still capture most of the variance regarding degrees of risk aversion. This study shows, however, that such a strong correlation does not exist. Though, most individuals exhibit concave utility and convex probability weighting, the two components show no correlation. Thus neglecting one component entails a loss.
Subjects: 
risk attitudes
cumulative prospect theory
experimental study
JEL: 
C91
D81
Document Type: 
Working Paper

Files in This Item:
File
Size
459.71 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.