Abstract
Are risk preferences stable over time? To address this question we elicit risk preferences from the same pool of subjects at two different moments in time. To interpret the results, we use a Fechner stochastic choice model in which the revealed preference of individuals is governed by some underlying preference, together with a random error. We take cumulative prospect theory as the underlying preference model (Kahneman and Tversky, Econometrica 47:263–292, 1979; Tversky and Kahneman, Journal of Risk and Uncertainty 5:297–323, 1992). We observe that the aggregate pattern of preferences is very similar in both sessions, and it matches the results reported in the literature. Most subjects are risk averse for gains, and risk seeking for losses. However, the subjects that jointly agree with the reflection effect of prospect theory are around 50%. The percentage of individuals that change their responses across sessions is quite high, 63%. Estimating the stochastic choice model we find that 72% of the subjects have an underlying preference which agrees with the reflection effect of prospect theory. The remaining 28% are mainly classified as risk averse for both gains and losses. The results reinforce the empirical validity of the reflection effect. Deviations from the reflection effect can be attributed to noise, as well as to the existence of a fraction of risk averse subjects.
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Acknowledgments
Han Bleichrodt, Antoni Bosch-Domènech, Philippe Delquié, Franz Heukamp, Robin Hogarth, and the participants of the Barcelona Economics Decision Group, gave many helpful comments. Manel Baucells is also grateful to the Fundación BBVA for financial support.
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This paper is part of the Ph.D. thesis of Antonio Villasís.
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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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Baucells, M., Villasís, A. Stability of risk preferences and the reflection effect of prospect theory. Theory Decis 68, 193–211 (2010). https://doi.org/10.1007/s11238-009-9153-3
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DOI: https://doi.org/10.1007/s11238-009-9153-3