Advances in Prospect Theory: Cumulative Representation of Uncertainty

Tversky, Amos; Kahneman, Daniel

doi:10.1007/978-3-319-20451-2_24

Cited by 2,351 publications

(4,830 citation statements)

References 42 publications

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“…First, attitudes to risks borne by others have not yet been introduced into economic theory. 4 Second, there is ample evidence from descriptive decision theory that risk propensity differs with respect to gains and losses (e.g., Tversky and Kahneman, 1992). As most theory models of talent allocation include risky payoffs with losses for others, there is thus a need for an experimental analysis of social risk taking with negative externalities, which, to the best of our knowledge, this paper is among the first to provide.…”

Section: Introductionmentioning

confidence: 92%

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The good, the bad, and the talented: Entrepreneurial talent and selfish behavior

Weitzel

Urbig

Desai

et al. 2015

Global Entrepreneurship, Institutions and Incentives

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Abstract:Talent allocation models assume that entrepreneurially talented people are selfish and thus allocate into unproductive or even destructive activities if these offer the highest private returns. This paper experimentally analyzes selfish preferences of the entrepreneurially talented. We find that making a distinction between creative talent and business talent explains systematic differences in selfish behavior. Generally, both the less business talented and the more creative are more willing to forego private payoffs to avoid losses to others. A moderator analysis reveals that less creative individuals with business talent are significantly more selfish than all others, including the creative with business talent. This finding applies to both certain and risky payoffs with and without negative externalities. The paper makes a contribution to entrepreneurship research by qualifying the implications of talent allocation models and highlighting the importance of distinguishing between the two types of entrepreneurial talent. We also add to the field of experimental economics by advancing research on altruism under risk and with negative externalities.

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Section: Introductionmentioning

confidence: 92%

“…Because risk propensity varies with respect to gains and losses (e.g., Tversky and Kahneman, 1992), we replicate Treatment 2 with a negative prize . This generates the following expected payoffs for Treatment 3:…”

Section: Decision Tasksmentioning

confidence: 99%

The good, the bad, and the talented: Entrepreneurial talent and selfish behavior

Weitzel

Urbig

Desai

et al. 2015

Global Entrepreneurship, Institutions and Incentives

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“…However, bequest motives cannot explain patterns of nearly no annuitization and/or choice of period certain guarantees among people without heirs. A different explanation for the popularity of period certain options can be found by considering the decision using concepts from cumulative prospect theory (Tversky & Kahneman, 1992). For example, loss aversion may make annuities unattractive when consumers perceive the forfeiture of the annuity purchase price due to early death as a loss either to themselves or their family and heirs (Hu and Scott 2007).…”

Section: The Role Of Annuities In Consumer Decumulationmentioning

confidence: 99%

Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Shu

Zeithammer

Payne

2016

Journal of Marketing Research

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Decisions about life annuities are an important part of consumer decumulation of retirement assets, yet are relatively underexplored by marketing researchers studying consumer financial decision-making. In this paper we propose and estimate a model of individual preferences for life annuity attributes using a choice-based stated-preference survey. Annuities are presented in terms of consumer-relevant attributes such as monthly income, yearly adjustments, period certain guarantees, and company financial strength. We find that attributes directly influence preferences beyond their impact on the annuity's expected present value. The strength of the direct influence depends on how annuities are described: when represented only via basic attributes, consumers undervalue inflation protection and preferences are not monotonically increasing in duration of period certain guarantees. When descriptions are enriched with cumulative payment information, consumers no longer undervalue inflation protection, but nonlinear preferences for period certain options remain. We find that among annuities with the same expected payout but different annual increases and period certain guarantees, the proportion of consumers choosing the annuity over self-management can vary by more than a factor of two. With baby boomers now retiring at the rate of almost 10,000 per day, the issue of decumulation of retirement assets is increasingly important to economists, public policy experts, and the financial services industry. It should also be of interest to researchers in marketing because consumers in the market for decumulation products, such as annuities, face a choice problem with large financial stakes, limited learning opportunities, difficult consumption tradeoffs, multiple sources of uncertainty, issues of trust and branding, and long time periods. All of these aspects of the decumulation problem are topics on which marketing research can offer important insights. This paper studies the structure of consumer preferences for life annuities -an important class of decumulation products. We employ a choice-based conjoint analysis to measure consumer preferences and relate them to the underlying financial value of the products. KeywordsAnnuities, as well as many other financial products, provide a unique setting for choice modeling because most annuity attributes have calculable expected present value that can be directly compared to consumers' revealed utilities. Consequently, we are able to see whether an attribute influences demand only through its contribution to the normative net present financial value of the annuity product ("NPV"), or whether attribute values have psychological worth "beyond NPV." We find that a typical consumer choosing from a set of annuities does not merely maximize the expected financial value, but also reacts to several product attributes directlyexpressing preferences beyond the effect of attributes on the financial value. For example, most consumers overvalue medium (10-20 years) levels of period-certa...

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“…To test whether participants' decisions are consistent with non-linear probability weighting (see Berns et al, 2007, for more detail), we estimated values for γ in a standard specification for non-linear weighting (Tversky & Kahneman, 1992): Across all 37 subjects, the estimated median value was 0.685 for γ and was thus consistent with an inverted S-shaped probability weighting function, and with previous studies. We also considered the incidence of common-ratio-violations.…”

Section: Probability Weightingmentioning

confidence: 66%

“…We choose y 0 as the activation associated with p = 1/3 for our study in light of an extensive behavioral literature on probability weighting in the financial domain suggesting that the probability weighting function crosses the diagonal in the vicinity of p = 0.4 (Abdellaoui, 2000;Kahneman & Tversky, 1979;Tversky & Kahneman, 1992;Wu & Gonzalez, 1996). In our experiment, the probability prospect that came closest to meeting these requirements was p = 1/3.…”

Section: Probability Weightingmentioning

confidence: 99%

Three studies on the neuroeconomics of decision-making when payoffs are real and negative

Berns¹,

Capra²,

Moore³

et al.

Neuroeconomics

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Purpose-We summarize three previous neuroeconomic studies with two features that distinguish them from most others in experimental economics: (1) the use of physical pain to induce incentives and (2) acquisition of data on brain activation levels. By correlating behavior when payoffs are painful with brain activation, we are able to test for the neurobiological relevance of important phenomena previously observed in experimental studies that are at odds with classical economic theories of decision-making. These specific phenomena are (a) negative discounting of future payoffs; (b) nonlinear probability weighting; (c) the experience of regret and rejoice when making a decision under risk.Methodology/approach-The expectation of pain is created through the use of mild electric shocks to the top of the foot. Pain confers disutility, so decisions are made in the domain of losses relative to the status quo. Simultaneous with these decisions, brain activation data is acquired through functional magnetic resonance imaging (fMRI).Findings-We find evidence for negative time discounting of electric shocks. Participants who exhibited the most extreme forms of this discounting were distinguished by early and robust activation of a subset of the cortical pain matrix. We also find evidence for probability weighting in the domain of electric shocks, which is manifest at the neural level. We find evidence both behaviorally and neurally for regret and rejoice functions for painful outcomes.Originality/value of chapter-Previous experimental economic studies in the domain of losses have typically used monetary rewards. Here, we report behavioral effects and neural correlates using pain.

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Advances in Prospect Theory: Cumulative Representation of Uncertainty

Cited by 2,351 publications

References 42 publications

The good, the bad, and the talented: Entrepreneurial talent and selfish behavior

The good, the bad, and the talented: Entrepreneurial talent and selfish behavior

Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Three studies on the neuroeconomics of decision-making when payoffs are real and negative

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