Kontek, Krzysztof (2009): Are People Really Risk Seeking for Losses?

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Abstract
This short paper demonstrates that the claim of Cumulative Prospect Theory (CPT) that people are risk seeking for loss prospects, which confirmed a hypothetical assumption of the earlier Prospect Theory (PT), appears to be merely a result of using a specific form of the probability weighting function to estimate the power factor of the value function. Using experimental data and the form of the probability weighting function presented by CPT gives a power factor for losses of less than 1. This would mean that people are risk seeking for loss prospects. However, once more flexible, twoparameter forms are used, the power factor takes on values between 1.04 and 1.10. This, however, makes the value function convex, which indicates risk aversion. It follows that people are generally risk averse both for gains and for losses. This contradicts one of the main theses of Prospect Theory.
Item Type:  MPRA Paper 

Original Title:  Are People Really Risk Seeking for Losses? 
Language:  English 
Keywords:  Prospect Theory; Value Function; Probability Weighting Function; Risk Attitude 
Subjects:  D  Microeconomics > D0  General > D03  Behavioral Economics; Underlying Principles D  Microeconomics > D8  Information, Knowledge, and Uncertainty > D81  Criteria for DecisionMaking under Risk and Uncertainty C  Mathematical and Quantitative Methods > C9  Design of Experiments > C91  Laboratory, Individual Behavior D  Microeconomics > D8  Information, Knowledge, and Uncertainty > D87  Neuroeconomics 
Item ID:  19326 
Depositing User:  Krzysztof Kontek 
Date Deposited:  15. Dec 2009 07:59 
Last Modified:  19. Feb 2013 21:29 
References:  Gonzales, R., Wu, G., (1999). On the Shape of the Probability Weighting Function. Cognitive Psychology, 38, pp 129166. Kahneman, D., Tversky, A., (1979). Prospect theory: An analysis of decisions under risk. Econometrica, 47, pp 313327. Prelec, D., (1998). The probability weighting function. Econometrica, 60, pp 497529. Tversky A., Kahneman D., (1992). Advances in Prospect Theory: Cumulative Representation of Uncertainty. Journal of Risk and Uncertainty, vol. 5(4), October, pp 297323. 
URI:  http://mpra.ub.unimuenchen.de/id/eprint/19326 