Rablen, M.D. orcid.org/0000-0002-3521-096X (2023) Loss aversion, risk aversion, and the shape of the probability weighting function. Working Paper. Sheffield Economic Research Paper Series, 2023013 (2023013). Department of Economics, University of Sheffield ISSN 1749-8368
Abstract
Loss aversion, risk aversion, and the probability weighting function (PWF) are three central concepts in explaining decision making under risk. I examine interlinkages between these concepts in a model of decision making that allows for loss averse/tolerant stochastic reference dependence and optimism/pessimism over probability distributions. I give a preference interpretation to commonly observed shapes of PWF and to risk aversion. In particular, I establish a connection between loss aversion and both risk aversion and the inverse-S PWF: loss aversion is a necessary condition to observe each of these phenomena. The results extend to distinct PWFs in the gain and loss domains, as under prospect theory.
Metadata
Item Type: | Monograph |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2023 The Author(s). For reuse permissions, please contact the Author(s). The Sheffield Economic Research Paper Series (SERPS) offers a forum for the research output of the Department of Economics, University of Sheffield. Papers are reviewed for quality and presentation by two internal referees and a departmental editor. However, the contents and opinions expressed remain the responsibility of the author(s). Comments are welcomed and should be addressed to the individual author(s). |
Keywords: | Probability Weighting; Rank Dependent; Expected Utility; Loss Aversion; Risk Aversion; Reference Dependence; Optimism; Pessimism; Prospect Theory |
Dates: |
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Institution: | The University of Sheffield |
Academic Units: | The University of Sheffield > Faculty of Social Sciences (Sheffield) > Department of Economics (Sheffield) > Sheffield Economics Research Papers Series The University of Sheffield > Faculty of Social Sciences (Sheffield) > Department of Economics (Sheffield) |
Depositing User: | Symplectic Sheffield |
Date Deposited: | 07 Jun 2023 13:20 |
Last Modified: | 07 Jun 2023 23:27 |
Published Version: | https://www.sheffield.ac.uk/economics/research/ser... |
Status: | Published |
Publisher: | Department of Economics, University of Sheffield |
Series Name: | Sheffield Economic Research Paper Series |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:200054 |