Measuring loss aversion under ambiguity: a method to make prospect theory completely observable

Abdellaoui, Mohammed, Bleichrodt, Han, l'Haridon, Olivier and van Dolder, Dennie (2016) Measuring loss aversion under ambiguity: a method to make prospect theory completely observable. Journal of Risk and Uncertainty, 52 (1). pp. 1-20. ISSN 1573-0476

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We propose a simple, parameter-free method that, for the first time, makes it possible to completely observe Tversky and Kahneman’s (1992) prospect theory. While methods exist to measure event weighting and the utility for gains and losses separately, there was no method to measure loss aversion under ambiguity. Our method allows this and thereby it can measure prospect theory’s entire utility function. Consequently, we can properly identify properties of utility and perform new tests of prospect theory. We implemented our method in an experiment and obtained support for prospect theory. Utility was concave for gains and convex for losses and there was substantial loss aversion. Both utility and loss aversion were the same for risk and ambiguity, as assumed by prospect theory, and sign-comonotonic trade-off consistency, the central condition of prospect theory, held.

Item Type: Article
Additional Information: The final publication is available at Springer via
Keywords: Prospect theory ; Loss aversion ; Utility for gains and losses ; Risk ; Ambiguity ; Elicitation methods
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Identification Number:
Depositing User: Van Dolder, Dennie
Date Deposited: 28 Apr 2016 10:06
Last Modified: 04 May 2020 17:28

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