Theory and Decision

, Volume 63, Issue 3, pp 205–231 | Cite as

Prospect-theory’s Diminishing Sensitivity Versus Economics’ Intrinsic Utility of Money: How the Introduction of the Euro can be Used to Disentangle the Two Empirically

  • Peter P. WakkerEmail author
  • Veronika Köbberling
  • Christiane Schwieren
Open Access


The introduction of the euro gave a unique opportunity to empirically disentangle two components of utility: intrinsic value, a rational component central in economics, and the numerosity effect (going by numbers while ignoring units), a descriptive and irrational component central in prospect theory and underlying the money illusion. We measured relative risk aversion in Belgium before and after the introduction of the euro, and could consider changes in intrinsic value while keeping numbers constant, and changes in numbers while keeping intrinsic value constant. Intrinsic value significantly affected risk aversion, and the numerosity effect did not. Our study is the first to confirm the classical hypothesis of increasing relative risk aversion while avoiding irrational distortions due to the numerosity effect.


utility currency change prospect theory psychology of money money illusion relative risk aversion 


  1. Abdellaoui M. (2000). Parameter-free elicitation of utilities and probability weighting functions. Management Science 46: 1497–1512CrossRefGoogle Scholar
  2. Abdellaoui, M., Attema, A. E. and Bleichrodt, H. (2005a), Intertemporal Tradeoffs for Gains and Losses: An Experimental Measurement of Discounted Utility, iMTA/iBMG, Erasmus University, Rotterdam, the Netherlands.Google Scholar
  3. Abdellaoui, M., Bleichrodt, H. and L’Haridon, O. (2007a), A Tractable Method to Measure Utility and loss aversion under prospect theory, in preparation, iMTA/iBMG, Erasmus University, Rotterdam, the Netherlands.Google Scholar
  4. Abdellaoui, M., Bleichrodt, H. and Paraschiv, C. (2007b), Measuring loss aversion under prospect theory: A parameter-free approach, Management Science (forthcoming).Google Scholar
  5. Abdellaoui M., Vossmann F., Weber M. (2005b). Choice-based elicitation and decomposition of decision weights for gains and losses under uncertainty. Management Science 51: 1384–1399CrossRefGoogle Scholar
  6. Allen F. (1987). Discovering personal probabilities when utility functions are unknown. Management Science 33: 542–544Google Scholar
  7. Anscombe F.J., Aumann R.J. (1963). A definition of subjective probability. Annals of Mathematical Statistics 34: 199–205Google Scholar
  8. Armantier O. (2006). Do wealth differences affect fairness considerations. International Economic Review 47: 391–429CrossRefGoogle Scholar
  9. Arrow K.J. (1971). Essays in the Theory of Risk Bearing. North-Holland, AmsterdamGoogle Scholar
  10. Atkinson R.C., Herrnstein R.J., Lindzey G.E., Luce R.D. (eds) (1988). Stevens Handbook of Experimental Psychology (2nd ed). Wiley, New YorkGoogle Scholar
  11. Baron J. (1997). Confusion of relative and absolute risk in valuation. Journal of Risk and Uncertainty 14: 301–309CrossRefGoogle Scholar
  12. Barron G., Erev I. (2003). Small feedback-based decisions and their limited correspondence to description-based decisions. Journal of Behavioral Decision Making 16: 215–233CrossRefGoogle Scholar
  13. Barsky R.B., Juster F.T., Kimball M.S., Shapiro M.D. (1997). Preference parameters and behavioral heterogeneity: An experimental approach in the health and retirement study. Quarterly Journal of Economics 112: 537–579CrossRefGoogle Scholar
  14. Battalio R.C., Kagel J.H., Jiranyakul K. (1990). Testing between alternative models of choice under uncertainty: Some initial results. Journal of Risk and Uncertainty 3: 25–50CrossRefGoogle Scholar
  15. Battalio R.C., Kagel J.H., MacDonald D.N. (1985). Animal’s choices over uncertain outcomes: Some initial experimental evidence. American Economic Review 75: 597–613Google Scholar
  16. Benartzi S., Thaler R.H. (1995). Myopic loss aversion and the equity premium puzzle. Quarterly Journal of Economics 110: 73–92CrossRefGoogle Scholar
  17. Berg J.E., Daley L.A., Dickhaut J.W., O’Brien J.R. (1986). Controlling preferences for lotteries on units of experimental exchange. Quarterly Journal of Economics 101: 281–306CrossRefGoogle Scholar
  18. Binswanger H.P. (1981). Attitudes towards risk: Theoretical implications of an experiment in rural India. Economic Journal 91: 867–890CrossRefGoogle Scholar
  19. Bleichrodt H., Doctor J., Stolk E. (2005). A nonparametric elicitation of the equity-efficiency tradeoff in cost-utility. Journal of Health Econonomics 24: 655–678Google Scholar
  20. Booij, A.S. and van de Kuilen, G. (2006), A Parameter-Free Analysis of the Utility of Money for the General Population under Prospect Theory, CREED, University of Amsterdam, the Netherlands.Google Scholar
  21. Bornemann E. (1976). The Psychoanalysis of Money. Urizen Books, New YorkGoogle Scholar
  22. Bruner J.S., Goodman C.C. (1947). Value and need as organizing factors in perception. Journal of Abnormal and Social Psychology 42: 33–44CrossRefGoogle Scholar
  23. Brysbaert M., Fias W., Noël M.-P. (1998). The whorfian hypothesis and numerical cognition: Is “twenty-four” processed in the same way as “four-and-twenty”?. Cognition 66: 51–77CrossRefGoogle Scholar
  24. Budescu D.V., Weiss W. (1987). Reflection of transitive and intransitive preferences: A test of prospect theory. Organizational Behavior and Human Decision Processes 39: 184–202CrossRefGoogle Scholar
  25. Camerer C.F. (1989). An experimental test of several generalized utility theories. Journal of Risk and Uncertainty 2: 61–104CrossRefGoogle Scholar
  26. Cohen M., Jaffray J.-Y., Said T. (1987). Experimental comparisons of individual behavior under risk and under uncertainty for gains and for losses. Organizational Behavior and Human Decision Processes 39: 1–22CrossRefGoogle Scholar
  27. Cohn R.A., Lewellen W.G., Lease R.C., Schlarbaum G.G. (1975). Individual investor risk aversion and investment portfolio composition. Journal of Finance 30: 605–620CrossRefGoogle Scholar
  28. Currim I.S., Sarin R.K. (1989). Prospect versus utility. Management Science 35: 22–41Google Scholar
  29. Darke P.R., Freedman J.L. (1993). Deciding whether to seek a bargain: Effects of both amount and percentage off. Journal of Applied Psychology 78: 960–965CrossRefGoogle Scholar
  30. Davis D.D., Holt C.A. (1993), Experimental Economics. Princeton University Press, PrincetonGoogle Scholar
  31. Dickhaut J.W., McCabe K., Nagode J.C., Rustichini A., Smith K., Pardo J.V. (2003). The impact of the certainty context on the process of choice. Proceedings of the National Academy of Sciences 100: 3536–3541CrossRefGoogle Scholar
  32. Edwards W. (1954). The theory of decision making. Psychological Bulletin 51: 380–417CrossRefGoogle Scholar
  33. EOS Gallup Europe (2002), Euro attitudes—euro zone, flash Eurobarometer No 121/3, June 2002. URL: public_opinion/archives/flash_arch.htmGoogle Scholar
  34. European Commission (2002), Eurobarometer—public opinion in the European union. Report no. 57, Spring 2002. URL: [ comm/dg10/epo/eb.html]Google Scholar
  35. Fantino E., Goldshmidt J.N. (2000). Differences, not ratios, control choice in an experimental analogue to foraging. Psychological Science 3: 229–233Google Scholar
  36. Fehr E., Tyran J.-R. (2001), Does money illusion matter?. American Economic Review 91: 1239–1262CrossRefGoogle Scholar
  37. Fennema H., van Assen M.A.L.M. (1998), Measuring the utility of losses by means of the tradeoff method. Journal of Risk and Uncertainty 17: 277–295CrossRefGoogle Scholar
  38. Fetherstonhaugh D., Slovic P., Johnson S.M., Friedrich J. (1997), Insensitivity to the value of human life: A study of psychophysical numbing. Journal of Risk and Uncertainty 14: 283–300CrossRefGoogle Scholar
  39. Fishburn P.C. and Kochenberger G.A. (1979), Two-piece von Neumann-Morgenstern utility functions. Decision Sciences 10: 503–518CrossRefGoogle Scholar
  40. Foltz G.S., Poltrock S.E. and Potts G.R. (1984), Mental comparison of size and magnitude: size congruity effects. Journal of Experimental Psychology: Learning, Memory and Cognition 10: 442–453CrossRefGoogle Scholar
  41. Forsythe R., Palfrey T.R. and Plott C.R. (1982), Asset valuation in an experimental market. Econometrica 50: 537–568CrossRefGoogle Scholar
  42. Friend I. and Blume M.E. (1975), The demand for risky assets. American Economic Review 65: 900–922Google Scholar
  43. Furnham A. and Argyle M. (1998), The Psychology of Money. Routledge, LondonGoogle Scholar
  44. Galanter, E. and Pliner, P. (1974), Cross-modality matching of money against other continua. In H. Moskowitz, B. Sharf, and J.C. Stevens (eds.), Sensation and Measurement: Papers in Honor of S.S. Stevens, Reidel, Dordrecht, the Netherlands, pp.65–76.Google Scholar
  45. Gamble A., Gärling T., Charlton J.P. and Ranyard R. (2002), Euro illusion: Psychological insights into price evaluations with a unitary currency. European Psychologist 7: 302–311CrossRefGoogle Scholar
  46. González-Vallejo C.C., Reid A.A. and Schiltz J. (2003), Context effects: the proportional difference model and the reflection of preference. Journal of Experimental Psychology: Learning, Memory, and Cognition 29: 942–953CrossRefGoogle Scholar
  47. Harless D.W. and Camerer C.F. (1994), The predictive utility of generalized expected utility theories. Econometrica 62: 1251–1289CrossRefGoogle Scholar
  48. Harris L. (1991), Stock price clustering and discreteness. Review of Finance 16: 1533–1597Google Scholar
  49. Harrison G.W. (1994), Expected utility theory and the experimentalists. Empirical Economics 19: 223–253CrossRefGoogle Scholar
  50. Harrison G.W., Johnson E., McInnes M.M. and Rutström E.E. (2005), Risk aversion and incentive effects: Comment. American Economic Review 95: 897–901CrossRefGoogle Scholar
  51. Harrison, G.W., Lau, M.I., and Rutström, E.E. (2006), Estimating risk attitudes in Denmark: A field experiment, Scandinavian Journal of Economics (forthcoming).Google Scholar
  52. Harrison G.W., Lau M.I. and Williams M.B. (2002), Estimating individual discount rates in Denmark: A field experiment. American Economic Review 92: 1606–1617CrossRefGoogle Scholar
  53. Hershey J.C. and Schoemaker P.J.H. (1980), Prospect theory’s reflection hypothesis: A critical examination. Organizational Behavior and Human Performance 25: 395–418CrossRefGoogle Scholar
  54. Hogarth R.M. and Einhorn H.J. (1990), Venture theory: A model of decision weights. Management Science 36: 780–803Google Scholar
  55. Holt C.A. (1986), Preference reversals and the independence axiom. American Economic Review 76: 508–513Google Scholar
  56. Holt C.A. and Laury S.K. (2002), Risk aversion and incentive effects. American Economic Review 92: 1644–1655CrossRefGoogle Scholar
  57. Huber J., Ariely D., and Fischer G. (2001), Expressing preference in a principal-agent task: A comparison of choice, rating, and matching. Organizational Behavior and Human Decision Processes 87: 66–90CrossRefGoogle Scholar
  58. Jevons, W.S. (1889), The Theory of Political Economy (5th edition 1957, Kelley and MacMillan, New York; other ed. Penguin, 1970.)Google Scholar
  59. Jonas E., Greitemeyer T., Frey D. and Schulz-Hardt S. (2002), Psychological effects of the euro—experimental research on the perception of salaries and price estimations. European Journal of Social Psychology 32: 147–169CrossRefGoogle Scholar
  60. Juliusson A., Gamble A., and Gärling T. (2006), Learning the value of a new currency from prices. Journal of Experimental Psychology: Applied 11: 45–52CrossRefGoogle Scholar
  61. Kachelmeier, S.J. and Shehata, M. (1992), Examining risk preferences under high monetary incentives: Experimental evidence from the people’s republic of China, American Economic Review 82, 1120–1141; for comment see Kachelmeier, S.J. and Shehata, M. (1994), American Economic Review 84, 1104–1106.Google Scholar
  62. Kahneman D. (2003), A perspective on judgment and choice; mapping bounded rationality. American Psychologist 58: 697–720CrossRefGoogle Scholar
  63. Kahneman D. and Tversky A. (1979), Prospect theory: An analysis of decision under risk. Econometrica 47: 263–291CrossRefGoogle Scholar
  64. Kahneman D., Wakker P.P., and Sarin R.K. (1997), Back to Bentham? Explorations of experienced utility. Quarterly Journal of Economics 112: 375–405CrossRefGoogle Scholar
  65. Kirkpatrick L.A. and Epstein S. (1992), Cognitive-experiential self-theory and subjective probability: Further evidence for two conceptual systems. Journal of Personality and Social Psychology 63: 534–544CrossRefGoogle Scholar
  66. Kühberger A., Schulte-Mecklenbeck M., and Perner J. (1999), The effects of framing, reflection, probability, and payoff on risk preference in choice tasks. Organizational Behavior and Human Decision Processes 78: 204–231CrossRefGoogle Scholar
  67. Laury, S.K. and Holt, C.A. (2007), Further reflections on prospect theory. In Cox, J.C. and Harrison. G. (eds.), Risk Aversion in Experiments (Experimental Economics, Volume 12), JAI Press, Greenwich, CT, forthcoming.Google Scholar
  68. Leontief W.W. (1936), The fundamental assumptions of Mr. Keynes’ monetary theory of unemployment. Quarterly Journal of Economics 5: 192–197Google Scholar
  69. Levin I.P. and Hart S.S. (2003), Risk preferences in young children: Early evidence of individual differences in reaction to potential gains and losses. Journal of Behavioral Decision Making 16: 397–413CrossRefGoogle Scholar
  70. List J.A. (2006), Using Hicksian surplus measures to examine consistency of individual preferences: Evidence from a field experiment. The Scandinavian Journal of Economics 108: 115–134CrossRefGoogle Scholar
  71. Loehman E. (1998), Testing risk aversion and nonexpected utility theories. Journal of Economic Behavior and Organization 33: 285–302CrossRefGoogle Scholar
  72. Loewenstein G.F. and Prelec D. (1992), Anomalies in intertemporal choice: Evidence and an interpretation. Quarterly Journal of Economics 107: 573–597CrossRefGoogle Scholar
  73. Loomes G. (1998), Probabilities vs money: A test of some fundamental assumptions about rational decision making. Economic Journal 108: 477–489CrossRefGoogle Scholar
  74. Lopes L.L. and Oden G.C. (1999), The role of aspiration level in risky choice: A comparison of cumulative prospect theory and SP/A theory. Journal of Mathematical Psychology 43: 286–313CrossRefGoogle Scholar
  75. Marques J.F. (1999) Changing ‘Europe’—the euro as a new subject for psychological research in numerical cognition. European Psychologist 4: 152–156CrossRefGoogle Scholar
  76. Meier-Pesti K. and Kirchler E. (2003), Attitudes towards the euro by national identity and relative national status. Journal of Economic Psychology 24: 293–299CrossRefGoogle Scholar
  77. Müller-Peters A. (1998), The significance of national pride and national identity to the attitude toward the single European currency: A Europe-wide comparison. Journal of Economic Psychology 19: 701–719CrossRefGoogle Scholar
  78. Mussweiler T. and Englich B. (2003), Adapting to the euro: Evidence from bias reduction. Journal of Economic Psychology 24: 285–292CrossRefGoogle Scholar
  79. Myagkov M.G. and Plott C.R. (1997), Exchange economies and loss exposure: Experiments exploring prospect theory and competitive equilibria in market environments. American Economic Review 87: 801–828Google Scholar
  80. Nestle F.O., Speidel H. and Speidel M.O. (2002), High nickel release from 1- and 2-euro coins. Nature 419: 132CrossRefGoogle Scholar
  81. Noël M.-P. and Serron X. (1997), On the existence of intermediate representations in numerical processing. Journal of Experimental Psychology: Learning, Memory, and Cognition 23: 697–720CrossRefGoogle Scholar
  82. Ogaki M. and Zhang Q. (2001), Decreasing relative risk aversion and tests of risk sharing. Econometrica 69: 515–526CrossRefGoogle Scholar
  83. Pelham B.W., Sumarta T.T, and Myaskovsky L. (1994), The easy path from many to much: The numerosity heuristic. Cognitive Psychology 26: 103–133CrossRefGoogle Scholar
  84. Pennings J.M.E. and Smidts A. (2003), The shape of utility functions and organizational behavior. Management Science 49: 1251–1263CrossRefGoogle Scholar
  85. Pepermans R., Burgoyne C.B., and Müller-Peters A. (1998), European integration, psychology and the euro. Journal of Economic Psychology 19: 657–661CrossRefGoogle Scholar
  86. Peters E., Västfjäll D., Slovic P., Mertz C.K., Mazzocco K., Dickert S. (2006), Numeracy and decision making. Psychological Science 17: 407–413CrossRefGoogle Scholar
  87. Plott C.R. (1986), Rational choice in experimental markets. Journal of Business 59: S301–S327CrossRefGoogle Scholar
  88. Plott C.R. and Sunder S. (1982), Efficiency of experimental security markets with insider information: An application of rational-expectations models. Journal of Political Economy 90: 663–698CrossRefGoogle Scholar
  89. Prelec D. and Loewenstein G.F. (1991), Decision making over time and under uncertainty: A common approach. Management Science 37: 770–786CrossRefGoogle Scholar
  90. Quattrone G.A. and Tversky A. (1988), Contrasting rational and psychological analyses of political choice. American Political Science Review 82: 719–736CrossRefGoogle Scholar
  91. Rabin M. (2000), Risk aversion and expected-utility theory: A calibration theorem. Econometrica 68: 1281–1292CrossRefGoogle Scholar
  92. Raghubir P. and Srivastava J. (2002), Effect of face value on product valuation in foreign currencies. Journal of Consumer Research 29: 335–347CrossRefGoogle Scholar
  93. Rapoport A. (1984), Effects of wealth on portfolios under various investment conditions. Acta Psychologica 55: 31–51CrossRefGoogle Scholar
  94. Roth A.E. and Malouf M.W. (1979), Game-theoretic models and the role of information in bargaining. Psychological Review 86: 574–594CrossRefGoogle Scholar
  95. Schneider S.L. and Lopes L.L. (1986), Reflection in preferences under risk: who and when may suggest why. Journal of Experimental Psychology: Human Perception and Performance 12: 535–548CrossRefGoogle Scholar
  96. Schunk D. and Betsch C. (2006), Explaining heterogeneity in utility functions by individual differences in decision modes. Journal of Economic Psychology 27: 386–401CrossRefGoogle Scholar
  97. Selten R., Sadrieh A. and Abbink K. (1999), Money does not induce risk neutral behavior, but binary lotteries do even worse. Theory and Decision 46: 211–249CrossRefGoogle Scholar
  98. Shafir E., Diamond P.A. and Tversky A. (1997), Money illusion. Quarterly Journal of Economics 112: 341–374CrossRefGoogle Scholar
  99. Smith K., Dickhaut J.W., McCabe K. and Pardo J.V. (2002), Neuronal substrates for choice under ambiguity, risk certainty, gains and losses. Management Science 48: 711–718CrossRefGoogle Scholar
  100. Smith V.L. (1982), Microeconomic systems as an experimental science. American Economic Review 72: 923–955Google Scholar
  101. Soman, D., Wertenbroch, K., and Chattopadhyay, A. (2002), Currency numerosity effects on the perceived value of transactions, INSEAD, working paper 124/MKT, Fontainebleau, France.Google Scholar
  102. Sonnemans J. (2006), Price clustering and natural resistance points in the Dutch stock market: A natural experiment. European Economic Review 50: 1937–1950CrossRefGoogle Scholar
  103. Starmer C. (2000), Developments in non-expected utility theory: The hunt for a descriptive theory of choice under risk. Journal of Economic Literature 38: 332–382Google Scholar
  104. Starmer C. and Sugden R. (1991), Does the random-lottery incentive system elicit true preferences? An experimental investigation. American Economic Review 81: 971–978Google Scholar
  105. Stenkula M. (2004), The euro cash changeover process. Kyklos 57: 265–286CrossRefGoogle Scholar
  106. Thaler R.H. (1980), Towards a positive theory of consumer choice. Journal of Economic Behavior and Organization 1: 39–60CrossRefGoogle Scholar
  107. Thaler R.H. (1985), Mental accounting and consumer choice. Marketing Science 4: 199–214Google Scholar
  108. Tversky A. and Kahneman D. (1992), Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty 5: 297–323CrossRefGoogle Scholar
  109. Wakker, P.P., Timmermans, D.R.M., and Machielse, I.A. (2006), The effects of information about probabilities on insurance decisions, Management Science, (forthcoming).Google Scholar
  110. Weber E.U. and Bottom W.P. (1989), Axiomatic measures of perceived risk: Some tests and extensions. Journal of Behavioral Decision Making 2: 113–131CrossRefGoogle Scholar
  111. Zorzi, M., Priftis, K. and Umiltà, C. (2002), Neglect disrupts the mental number line, Nature, May, 417, 138–139.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  • Peter P. Wakker
    • 1
    Email author
  • Veronika Köbberling
    • 2
  • Christiane Schwieren
    • 3
  1. 1.Department of EconomicsUniversity of MaastrichtMaastrichtThe Netherlands
  2. 2.AXA Service AGKölnGermany
  3. 3.Department of EconomicsUniversity of Heidelberg HeidelbergGermany

Personalised recommendations