NDLI: Stability of risk preferences and the reflection effect of prospect theory

Content Provider	Springer Nature Link
Author	Baucells, Manel Villasís, Antonio
Copyright Year	2009
Abstract	Are risk preferences stable over time? To address this question we elicit risk preferences from the same pool of subjects at two different moments in time. To interpret the results, we use a Fechner stochastic choice model in which the revealed preference of individuals is governed by some underlying preference, together with a random error. We take cumulative prospect theory as the underlying preference model (Kahneman and Tversky, Econometrica 47:263–292, 1979; Tversky and Kahneman, Journal of Risk and Uncertainty 5:297–323, 1992). We observe that the aggregate pattern of preferences is very similar in both sessions, and it matches the results reported in the literature. Most subjects are risk averse for gains, and risk seeking for losses. However, the subjects that jointly agree with the reflection effect of prospect theory are around 50%. The percentage of individuals that change their responses across sessions is quite high, 63%. Estimating the stochastic choice model we find that 72% of the subjects have an underlying preference which agrees with the reflection effect of prospect theory. The remaining 28% are mainly classified as risk averse for both gains and losses. The results reinforce the empirical validity of the reflection effect. Deviations from the reflection effect can be attributed to noise, as well as to the existence of a fraction of risk averse subjects.
Starting Page	193
Ending Page	211
Page Count	19
File Format	PDF
ISSN	00405833
Journal	Theory and Decision
Volume Number	68
Issue Number	1-2
e-ISSN	15737187
Language	English
Publisher	Springer US
Publisher Date	2009-05-27
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Reflection effect Risk preferences Stability of preferences Operations Research/Decision Theory Methodology of the Social Sciences Game Theory, Economics, Social and Behav. Sciences Game Theory/Mathematical Methods Economic Theory
Content Type	Text
Resource Type	Article
Subject	Arts and Humanities Economics, Econometrics and Finance Developmental and Educational Psychology Social Sciences Decision Sciences Applied Psychology Computer Science Applications

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