Risk aversion in cumulative prospect theory

Ulrich Schmidt; Horst Zank

doi:10.1287/mnsc.1070.0762

Risk aversion in cumulative prospect theory

Ulrich Schmidt, Horst Zank

Economics

Research output: Contribution to journal › Article › peer-review

Abstract

This paper characterizes the conditions for strong risk aversion and second-order stochastic dominance for cumulative prospect theory. Strong risk aversion implies a convex weighting function for gains and a concave one for losses. It does not necessarily imply a concave utility function. The latter does follow if the weighting functions are continuous. By investigating the exact relationship between loss aversion and strong risk aversion, a natural index for the degree of loss aversion is derived. © 2008 INFORMS.

Original language	English
Pages (from-to)	208-216
Number of pages	8
Journal	MANAGEMENT SCIENCE
Volume	54
Issue number	1
DOIs	https://doi.org/10.1287/mnsc.1070.0762
Publication status	Published - Jan 2008

Keywords

Cumulative prospect theory
Decision analysis theory
Loss aversion
Risk
Risk aversion
Second-order stochastic dominance

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10.1287/mnsc.1070.0762

http://mansci.journal.informs.org/cgi/reprint/54/1/208

Cite this

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Risk aversion in cumulative prospect theory

Abstract

Keywords

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