An experimental comparison of risky and riskless choice-limitations of prospect theory and expected utility theory

Hui Kuan Chung, Paul Glimcher, Agnieszka Tymula

Research output: Contribution to journalArticle

Abstract

Prospect theory, used descriptively for decisions under both risk and certainty, presumes concave utility over gains and convex utility over losses; a pattern widely seen in lottery tasks. Although such discontinuous gain-loss reference-dependence is also used to model riskless choices, only limited empirical evidence supports this use. In incentive-compatible experiments, we find that gain-loss reflection effects are not observed under riskless choice as predicted by prospect theory, even while in the same subjects gain-loss reflection effects are observed under risk. Our empirical results challenge the application of choice models across both risky and riskless domains.

Original languageEnglish (US)
Pages (from-to)34-67
Number of pages34
JournalAmerican Economic Journal: Microeconomics
Volume11
Issue number3
DOIs
StatePublished - 2018

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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