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A parametric analysis of prospect theory’s functionals for the general population
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  • Open Access
  • Published: 28 April 2009

A parametric analysis of prospect theory’s functionals for the general population

  • Adam S. Booij1,
  • Bernard M. S. van Praag2 &
  • Gijs van de Kuilen3 

Theory and Decision volume 68, pages 115–148 (2010)Cite this article

  • 2516 Accesses

  • 164 Citations

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Abstract

This article presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1,935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss-aversion coefficient of 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighting functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. In contrast to previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response toward the probability of obtaining the best possible outcome.

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Acknowledgements

We thank Peter P. Wakker, Gregory Jolivet, and Sebastien Roux for their respective helpful comments and suggestions, and CentERdata, in particular Vera Toepoel, for programming the experiment and providing the data.

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This article is distributed under the terms of the Creative Commons Attribution Noncommercial License which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.

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Authors and Affiliations

  1. Amsterdam School of Economics, Roetersstraat 11, 1018 WB, Amsterdam, The Netherlands

    Adam S. Booij

  2. Amsterdam School of Economics, Tinbergen Institute, Cesifo, IZA, DIW, Roetersstraat 11, 1018 WB, Amsterdam, The Netherlands

    Bernard M. S. van Praag

  3. TIBER, CentER, Tilburg University, P.O. Box 90153, 5000 LE, Tilburg, The Netherlands

    Gijs van de Kuilen

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  1. Adam S. Booij
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Correspondence to Adam S. Booij.

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Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.

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Booij, A.S., van Praag, B.M.S. & van de Kuilen, G. A parametric analysis of prospect theory’s functionals for the general population. Theory Decis 68, 115–148 (2010). https://doi.org/10.1007/s11238-009-9144-4

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  • Received: 30 September 2008

  • Accepted: 08 April 2009

  • Published: 28 April 2009

  • Issue Date: February 2010

  • DOI: https://doi.org/10.1007/s11238-009-9144-4

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Keywords

  • Prospect theory
  • Utility for gains and losses
  • Loss aversion
  • Subjective probability weighting
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