Cumulative Prospect Theory: Tests Using the Stochastic Dominance Approach

Levy, Haim

doi:10.1002/9781118258415.ch12

Cited by 2 publications

(2 citation statements)

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“…Moreover, there is concern that the contrast between the absence and presence of risk is not a good proxy for the different scenarios a decision maker might face. For example, in empirical research on economics and finance, many scenarios involve risky options with equiprobable outcomes (e.g., stock portfolios; see Levy, 2010), not risky versus riskless options. A categorical distinction between risky and riskless options can be found in several empirical studies: For instance, Schneider and Lopes (1986) found the reflection effect to be extremely irregular when individuals had to choose between pairs of multiple-outcome lotteries (see also Levy, 2010; but see Budescu & Weiss 1987).…”

Section: Towards the Use Of Strong Risk Attitudesmentioning

confidence: 99%

“…For example, in empirical research on economics and finance, many scenarios involve risky options with equiprobable outcomes (e.g., stock portfolios; see Levy, 2010), not risky versus riskless options. A categorical distinction between risky and riskless options can be found in several empirical studies: For instance, Schneider and Lopes (1986) found the reflection effect to be extremely irregular when individuals had to choose between pairs of multiple-outcome lotteries (see also Levy, 2010; but see Budescu & Weiss 1987). More recently, Mather et al (2012) showed that younger and older adults manifested the reflection effect when comparing between lotteries (in line with Budescu and Weiss 1987), but noted that both age groups only differed in their risk attitudes when one of the options available was a certain outcome.…”

Section: Towards the Use Of Strong Risk Attitudesmentioning

confidence: 99%

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Individual classification of strong risk attitudes: An application across lottery types and age groups

2017

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Empirical evaluations of risk attitudes often rely on a weak definition of risk that concerns preferences towards risky and riskless options (e.g., a lottery vs. a sure outcome). A large body of work has shown that individuals tend to be weak risk averse in choice contexts involving risky and riskless gains but weak risk seeking in contexts involving losses, a phenomenon known as the reflection effect. Recent attempts to evaluate age differences in risk attitudes have relied on this weak definition, testing whether the reflection effect increases or diminishes as we grow older. The present work argues that weak risk attitudes have limited generalizability and proposes the use of a strong definition of risk that is concerned with preferences towards options with the same expected value but different degrees of risk (i.e., outcome variance). A reanalysis of previouslypublished data and the results from a new study show that only a minority of individuals manifests the reflection effect under a strong definition of risk, and that, when facing certain lottery-pair types, older adults appear to be more risk seeking than younger adults.

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