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13
An Index Of Loss Aversion
 Journal of Economic Theory
, 2000
"... Under prospect theory, three components influence the risk attitude of a decision maker: the utility function, the probability weighting function, and loss aversion. Loss aversion reflects the observed behavior of decision makers' being more sensitive to losses than to gains, resulting in a uti ..."
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Under prospect theory, three components influence the risk attitude of a decision maker: the utility function, the probability weighting function, and loss aversion. Loss aversion reflects the observed behavior of decision makers' being more sensitive to losses than to gains, resulting in a utility function that is steeper for losses than for gains. Much of the empirically observed risk aversion is due to loss aversion. This paper proposes an index of loss aversion. It also demonstrates how the degree of loss aversion of two decision makers can be compared and how its influences on comparative risk aversion can be examined. The main result characterizes comparative loss aversion in terms of preferences.
Decisionfoundations for properties of nonadditive measures: general state spaces or general outcome spaces
, 2003
"... ..."
Preference change through choice
 In
, 2011
"... This is the final published version of: Johansson, L., Hall, L., & Chater, N. (2011). Preference change through choice. In R. Dolan & T. Sharot (Eds.) (2011). Neuroscience of Preference and Choice. Elsevier Academic Press. pp. 121141. Opening Paragraph: In an unforgettable performance by t ..."
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This is the final published version of: Johansson, L., Hall, L., & Chater, N. (2011). Preference change through choice. In R. Dolan & T. Sharot (Eds.) (2011). Neuroscience of Preference and Choice. Elsevier Academic Press. pp. 121141. Opening Paragraph: In an unforgettable performance by the English comedian Eddie Izzard, he portrays the Spanish Inquisition as conducted by the wimpy Anglican Church. Playing a supremely domesticated inquisitor, he offers the accused heretics the intriguing choice between “Cake or Death? ” Apart from the hilariousness of this scene, the social scientist can appreciate it as one of the last safe havens for neoclassical economics, rational choice, and expected utility theory, because people really and truly have stable and identifiable preferences to help them decide between cake and death. There is simply no amount of socialpsychology shenanigans that could push this preference around (no matter how little Festinger would pay people for choosing the death sentence, it would not generate enough cognitive dissonance to
Competence Effects for Choices involving Gains and Losses
, 2005
"... This paper investigates how choices are affected by the level of knowledge one has about the decision being made. We analyze the effect of knowledge on decisions involving gains and decisions involving losses. For decisions involving gains, we replicate Kilka and Weber’s results (2002), finding that ..."
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This paper investigates how choices are affected by the level of knowledge one has about the decision being made. We analyze the effect of knowledge on decisions involving gains and decisions involving losses. For decisions involving gains, we replicate Kilka and Weber’s results (2002), finding that decision makers are more attracted to choices that they feel more knowledgeable about. However, for decisions involving losses, we find no differences in the attractiveness of choices with different levels of knowledge. We conclude that Heath and Tverky’s competence hypothesis (1991) does not hold in the losses domain of our sample.
The effects of statistical information on risk and ambiguity attitudes, and on rational insurance decisions
, 2007
"... doi 10.1287/mnsc.1070.0735 ..."
A Parsimonious Choquet Model of Subjective Life Expectancy.” Working Paper No
, 2008
"... Abstract This paper develops and estimates a closedform model of Bayesian learning of subjective survival beliefs within the framework of Choquet decision theory. Data from the Health and Retirement Study (HRS) indicate that, on average, young respondents underestimate their true survival probabil ..."
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Abstract This paper develops and estimates a closedform model of Bayesian learning of subjective survival beliefs within the framework of Choquet decision theory. Data from the Health and Retirement Study (HRS) indicate that, on average, young respondents underestimate their true survival probability whereas old respondents overestimate their survival probability. Such subjective beliefs violate the rational expectations paradigm and are also not in line with the predictions of the rational Bayesian learning paradigm which implies convergence of subjective to underlying 'objective' probabilities. Based on the assumption of nonadditive beliefs, we therefore introduce a model of Bayesian learning which combines rational learning with the possibility that the interpretation of new information is prone to psychological attitudes. We estimate the parameters of our theoretical model by pooling the HRS data. Despite a parsimonious parametrization we find that our Choquet model results in a remarkable fit to the average subjective beliefs expressed in the data.
Modeling the Impact of Control on the Attractiveness of Risk in a Prospect Theory Framework
"... ABSTRACT Many decisions involve a degree of personal control over event outcomes, which is exerted through one's knowledge or skill. In three experiments we investigated differences in decision making between prospects based on (a) the outcome of random events and (b) the outcome of events cha ..."
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ABSTRACT Many decisions involve a degree of personal control over event outcomes, which is exerted through one's knowledge or skill. In three experiments we investigated differences in decision making between prospects based on (a) the outcome of random events and (b) the outcome of events characterized by control. In Experiment 1, participants estimated certainty equivalents (CEs) for bets based on either random events or the correctness of their answers to US state population questions across the probability spectrum. In Experiment 2, participants estimated CEs for bets based on random events, answers to US state population questions, or answers to questions about 2007 NCAA football game results. Experiment 3 extended the same procedure as Experiment 1 using a withinsubjects design. We modeled data from all experiments in a prospect theory (PT) framework to establish psychological mechanisms underlying decision behavior. Participants weighted the probabilities associated with bets characterized by control so as to reflect greater risk attractiveness relative to bets based on random events, as evidenced by more elevated weighting functions under conditions of control. This research elucidates possible cognitive mechanisms behind increased risk taking for decisions characterized by control, and implications for various literatures are discussed.
Perception of Probabilities in Situations of Risk A Case Based Approach
, 2005
"... This paper tries to provide a preliminary description of the mental process individuals experience in their attempt to comprehend stated probabilities of simple lotteries. The evaluation of probabilities is based on three main components: lotteries encountered in the past, the realizations of these ..."
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This paper tries to provide a preliminary description of the mental process individuals experience in their attempt to comprehend stated probabilities of simple lotteries. The evaluation of probabilities is based on three main components: lotteries encountered in the past, the realizations of these lotteries, and the similarity between stated probabilities. A probability is evaluated based on the experienced relative frequencies of outcomes that had that stated probability, as well as outcomes of other lotteries, that had similar stated probabilities. This process may result in distortion of probabilities as observed in the literature, in particular overvaluing low probabilities and undervaluing of high probabilities. We also …nd that when the size of the memory grows, the decision maker learns the real value of the stated probabilities. I am indebted to my advisor Itzhak Gilboa for extremely valuable suggestions at all stages of this project, and for his encouragement and advice. I also thank Eddie Dekel, Ady Pauzner, Ariel Rubinstein, Ran Spiegler and Peter Wakker for many helpful suggestions.
Overconfidence and Entrepreneurial Choice under Ambiguity
, 2013
"... Entrepreneurship studies have attributed to overconfidence decisions to start a new venture. Many decision situations, through which overconfidence is measured, entail some degrees of uncertainty (e.g., related to own skill or to competition). The aspect of uncertainty is largely neglected in overco ..."
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Entrepreneurship studies have attributed to overconfidence decisions to start a new venture. Many decision situations, through which overconfidence is measured, entail some degrees of uncertainty (e.g., related to own skill or to competition). The aspect of uncertainty is largely neglected in overconfidence studies or entrepreneurial research. Both uncertainty and overconfidence influence individuals ’ likelihood perceptions. Nevertheless, these two aspects are seldom jointly investigated, and the little evidence provides inconclusive results. In this study, we experimentally investigate how uncertainty, as a property of the situation, and overconfidence, as a characteristic of decision makers ’ beliefs, influence choice behavior. Our findings with Executive MBA participants show that overconfident decision makers choose less uncertain options for lowlikelihood outcomes and more uncertain options for high likelihood outcomes, contrary to neutralconfidence decision makers, which choices are in line with standard Prospect Theory predictions.