International audienceA growing body of qualitative evidence shows that loss aversion, a phenomenon formalized in prospect theory, can explain a variety of field and experimental data. Quantifications of loss aversion are, however, hindered by the absence of a general preference-based method to elicit the utility for gains and losses simultaneously. This paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions. Thus, it is the first to obtain a parameter-free elicitation of prospect theory's utility function on the whole domain. Our method also provides an efficient way to elicit utility midpoints, which are important in axiomatizations of utility. Several definitions of loss aversion have been put forward in the literature. According to most definitions we find strong evidence of loss aversion, at both the aggregate and the individual level. The degree of loss aversion varies with the definition used, which underlines the need for a commonly accepted definition of loss aversion

This paper presents evidence on income-related inequalities in self-assessed health in nine industrialized countries. Health interview survey data were used to construct concentration curves of self-assessed health, measured as a latent variable. Inequalities in health favoured the higher income groups and were statistically significant in all countries. Inequalities were particularly high in the United States and the United Kingdom. Amongst other European countries, Sweden, Finland and the former East Germany had the lowest inequality. Across countries, a strong association was found between inequalities in health and inequalities in income.

An important reason why people violate expected utility theory is probability weighting. Previous studies on the probability weighting function typically assume a specific parametric form, exclude heterogeneity in individual preferences, and exclusively consider monetary decision making. This study presents a method to elicit the probability weighting function in rank-dependent expected utility theory that makes no prior assumptions about the functional form of the probability weighting function. We use both aggregate and individual subject data, thereby allowing for heterogeneity of individual preferences, and we examine probability weighting in a new domain, medical decision making. There is significant evidence of probability weighting both at the aggregate and at the individual subject level. The modal probability weighting function is inverse S-shaped, displaying both lower subadditivity and upper subadditivity. Probability weighting is in particular relevant at the boundaries of the unit interval. Compared to studies involving monetary outcomes, we generally find more elevation of the probability weighting function. The robustness of the empirical findings on probability weighting indicates its importance. Ignoring probability weighting in modeling decision under risk and in utility measurement is likely to lead to descriptively invalid theories and distorted elicitations.nonexpected utility, decision theory, probability weighting, utility assessment, medical decision making

This paper gives a new explanation for the systematic disparity between standard gamble (SG) utilities and time trade-off (TTO) utilities. The common explanation, which is based on expected utility, is that the disparity is caused by curvature of the utility function for duration. This explanation is, however, incomplete. People violate expected utility and these violations lead to biases in SG and TTO utilities. The paper analyzes the impact on SG and TTO utilities of three main reasons why people violate expected utility: probability weighting, loss aversion, and scale compatibility. In the SG, the combined effect of utility curvature, probability weighting, loss aversion, and scale compatibility is an upward bias. In the TTO these factors lead both to upward and to downward biases. This analysis can also explain the tentative empirical finding that the TTO better describes people's preferences for health than the SG.

This paper proposes a quantitative modification of standard utility elicitation procedures, such as the probability and certainty equivalence methods, to correct for commonly observed violations of expected utility. Traditionally, decision analysis assumes expected utility not only for the prescriptive purpose of calculating optimal decisions but also for the descriptive purpose of eliciting utilities. However, descriptive violations of expected utility bias utility elicitations. That such biases are effective became clear when systematic discrepancies were found between different utility elicitation methods that, under expected utility, should have yielded identical utilities. As it is not clear how to correct for these biases without further knowledge of their size or nature, most utility elicitations still calculate utilities by means of the expected utility formula. This paper speculates on the biases and their sizes by using the quantitative assessments of probability transformation and loss aversion suggested by prospect theory. It presents quantitative corrections for the probability and certainty equivalence methods. If interactive sessions to correct for biases are not possible, then the authors propose to use the corrected utilities rather than the uncorrected ones in prescriptions of optimal decisions. In an experiment, the discrepancies between the probability and certainty equivalence methods are removed by the authors' proposal.Utility Elicitation, Probability Transformation, Loss Aversion

This paper provides an efficient method to measure utility under prospect theory, the most important descriptive theory of decision under uncertainty today. Our method is based on the elicitation of certainty equivalents for two-outcome prospects, a common way to measure utility. We applied our method in an experiment and found that most subjects were risk averse for gains and risk seeking for losses but had concave utility both for gains and for losses. This finding illustrates empirically that risk seeking and concave utility can coincide under prospect theory, a result that was derived theoretically by Chateauneuf and Cohen (1994). Utility was steeper for losses than for gains, which is consistent with loss aversion.Utility did not depend on the probability used in the elicitation, which offers support for prospect theory.

This paper studies life-cycle preferences over consumption and health status. We show that cost-effectiveness analysis is consistent with cost-benefit analysis if the lifetime utility function is additive over time, multiplicative in the utility of consumption and the utility of health status, and if the utility of consumption is constant over time. We derive the conditions under which the lifetime utility function takes this form, both under expected utility theory and under rank-dependent utility theory, which is currently the most important nonexpected utility theory. If cost-effectiveness analysis is consistent with cost-benefit analysis, it is possible to derive tractable expressions for the willingness to pay for quality-adjusted life-years (QALYs). The willingness to pay for QALYs depends on wealth, remaining life expectancy, health status, and the possibilities for intertemporal substitution of consumption.

This paper compares the relative performance of quality adjusted life years (QALYs) based on quality weights elicited by rating scale (RS), time trade-off (TTO) and standard gamble (SG). The standard against which relative performance is assessed is individual preference elicited by direct ranking. The correlation between predicted and direct ranking is significantly higher for TTO-QALYs than for RS-QALYs and SG-QALYs. This holds both based on mean Spearman rank correlation coefficients calculated per individual and based on two social choice rules: the method of majority voting and the Borda rule. Undiscounted TTO-QALYs are more consistent with direct ranking than discounted TTO-QALYs.