Revisiting the Gain-Loss Separability Assumption in Prospect Theory

2012 ◽  
Vol 26 (4) ◽  
pp. 385-396 ◽  
Author(s):  
Han-Hui Por ◽  
David V. Budescu
Keyword(s):  
Prospect Theory ◽  
Separability Assumption ◽  
Gain Loss

scholarly journals An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and Expected Utility Theory

2019 ◽  
Vol 11 (3) ◽  
pp. 34-67 ◽  
Author(s):  
Hui-Kuan Chung ◽  
Paul Glimcher ◽  
Agnieszka Tymula
Keyword(s):  
Prospect Theory ◽  
Empirical Evidence ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Experimental Comparison ◽  
Reference Dependence ◽  
Empirical Results ◽  
Incentive Compatible ◽  
Gain Loss

Prospect theory, used descriptively for decisions under both risk and certainty, presumes concave utility over gains and convex utility over losses; a pattern widely seen in lottery tasks. Although such discontinuous gain-loss reference-dependence is also used to model riskless choices, only limited empirical evidence supports this use. In incentive-compatible experiments, we find that gain-loss reflection effects are not observed under riskless choice as predicted by prospect theory, even while in the same subjects gain-loss reflection effects are observed under risk. Our empirical results challenge the application of choice models across both risky and riskless domains. (JEL C91, D12, D81)

scholarly journals Primate anterior insular cortex represents economic decision variables postulated by Prospect theory

2020 ◽  
Author(s):  
You-Ping Yang ◽  
Xinjian Li ◽  
Veit Stuphorn
Keyword(s):  
Prospect Theory ◽  
Reference Point ◽  
Contextual Information ◽  
Insular Cortex ◽  
Risk Attitude ◽  
Risky Decision ◽  
Anterior Insular Cortex ◽  
Decision Variables ◽  
Gain Loss

AbstractIn humans, risk attitude is highly context-dependent, varying with wealth levels or for different potential outcomes, such as gains or losses. These behavioral effects are well described by Prospect Theory, with the key assumption that humans represent the value of each available option asymmetrically as gain or loss relative to a reference point. However, it remains unknown how these computations are implemented at the neuronal level. Using a new token gambling task, we found that macaques, like humans, change their risk attitude across wealth levels and gain/loss contexts. Neurons in their anterior insular cortex (AIC) encode the ‘reference point’ (i.e. the current wealth level of the monkey) and the ‘asymmetric value function’ (i.e. option value signals are more sensitive to change in the loss than in the gain context) as postulated by Prospect Theory. In addition, changes in the activity of a subgroup of AIC neurons are correlated with the inter-trial fluctuations in choice and risk attitude. Taken together, we find that the role of primate AIC in risky decision-making is to monitor contextual information used to guide the animal’s willingness to accept risk.

Academic Decision Making and Prospect Theory

2011 ◽  
Vol 109 (1) ◽  
pp. 289-300
Author(s):  
Robert R. Mowrer ◽  
William B. Davidson
Keyword(s):  
College Students ◽  
Decision Making ◽  
Prospect Theory ◽  
High Probability ◽  
Dependent Measure ◽  
Risk Seeking ◽  
Gain Loss ◽  
Academic Decision Making ◽  
Fourfold Pattern ◽  
Loss Effect

Two studies are reported that investigate the applicability of prospect theory to college students' academic decision making. Exp. 1 failed to provide support for the risk-seeking portion of the fourfold pattern predicted by prospect theory but did find the greater weighting of losses over gains. Using a more sensitive dependent measure, in Exp. 2 the results of the first experiment were replicated in terms of the gain-loss effect and also found some support for the fourfold pattern in the interaction between probabilities and gain versus loss. The greatest risk-seeking was found in the high probability loss condition.

Reference-Dependent Risk Attitudes

2007 ◽  
Vol 97 (4) ◽  
pp. 1047-1073 ◽  
Author(s):  
Botond Kőszegi ◽  
Matthew Rabin
Keyword(s):  
Risk Aversion ◽  
Prospect Theory ◽  
Large Scale ◽  
Risk Attitudes ◽  
Additional Risk ◽  
First Order ◽  
Prior Expectation ◽  
Probabilistic Beliefs ◽  
Gain Loss ◽  
Delayed Consequences

We use Kőszegi and Rabin's (2006) model of reference-dependent utility, and an extension of it that applies to decisions with delayed consequences, to study preferences over monetary risk. Because our theory equates the reference point with recent probabilistic beliefs about outcomes, it predicts specific ways in which the environment influences attitudes toward modest-scale risk. It replicates “classical” prospect theory—including the prediction of distaste for insuring losses—when exposure to risk is a surprise, but implies first-order risk aversion when a risk, and the possibility of insuring it, are anticipated. A prior expectation to take on risk decreases aversion to both the anticipated and additional risk. For large-scale risk, the model allows for standard “consumption utility” to dominate reference-dependent “gain-loss utility,” generating nearly identical risk aversion across situations. (JEL D81)

scholarly journals An Empirical Test of Gain-Loss Separability in Prospect Theory

2008 ◽  
Vol 54 (7) ◽  
pp. 1322-1335 ◽  
Author(s):  
George Wu ◽  
Alex B. Markle
Keyword(s):  
Prospect Theory ◽  
Empirical Test ◽  
Gain Loss

scholarly journals You cannot accurately estimate an individual’s loss aversion using an accept-reject task

2020 ◽  
Author(s):  
Lukasz Walasek ◽  
Neil Stewart
Keyword(s):  
Prospect Theory ◽  
Loss Aversion ◽  
Model Parameters ◽  
Probability Weighting ◽  
Value Functions ◽  
Trade Off ◽  
Simple Version ◽  
The Poor ◽  
Gain Loss ◽  
Linear Probability

Prospect theory's loss aversion is often measured in the accept-reject task, in which participants accept or reject the chance of playing a series of gambles. The gambles are two-branch 50/50 gambles with varying gain and loss amounts (e.g., 50% chance of winning $20 and a 50% chance of losing $10). Prospect theory quantifies loss aversion by scaling losses up by a parameter λ. Here we show that λ suffers from extremely poor parameter recoverability in the accept-reject task. λ cannot be reliably estimated even for a simple version of prospect theory with linear probability weighting and value functions. λ cannot be reliably estimated even in impractically large experiments with participants subject to thousands of choices. The poor recoverability is driven by a trade-off between λ and the other model parameters. However, a measure derived from these parameters is extremely well recovered—and corresponds to estimating the area of gain-loss space in which people accept gambles. This area is equivalent to the number of gambles accepted in a given choice set. That is, simply counting accept decisions is extremely reliably recovered—but using prospect theory to make further use of exactly which gambles were accepted and which were rejected does not work.

scholarly journals Soccer Scores, Short-Term Mood and Fertility

2021 ◽  
Author(s):  
Fabrizio Bernardi ◽  
Marco Cozzani
Keyword(s):  
Prospect Theory ◽  
Sporting Events ◽  
Small Decrease ◽  
Short Term ◽  
Political Preferences ◽  
Gain Loss ◽  
Unexpected Outcomes ◽  
Betting Odds ◽  
Number Of Births

AbstractPrevious research has shown that seemingly irrelevant events such as unexpected outcomes in sporting events can affect mood and have relevant consequences for episodes of crime and violence, investing behavior and political preferences. In this article, we test whether mood shocks associated with unexpected results in soccer matches in Spain affect fertility. We use data on betting odds and actual scores to define mood shocks and link them to births by month and province in Spain, between 2001 and 2015. We find that unexpected losses of local teams lead to a small decrease in the number of births nine months thereafter. The effect is larger for more unexpected losses, in those provinces with the largest amount of support for the local team and robust to a number of placebo tests. We argue that these results are consistent with the gain–loss asymmetry predicted by prospect theory.

scholarly journals Gain-loss asymmetry in human experiential tasks

2021 ◽  
Author(s):  
◽  
Rana Asgarova
Keyword(s):  
Risk Aversion ◽  
Prospect Theory ◽  
Local Level ◽  
General Pattern ◽  
Variable Interval ◽  
Probability Discounting ◽  
Reflection Effect ◽  
Risk Seeking ◽  
Gain Loss ◽  
Gains And Losses

<p>Prospect Theory models behaviour in one-off decisions where outcomes are described. Prospect Theory describes risk aversion when the choice is between gains and risk seeking when the choice is between losses. This asymmetry is known as the reflection effect. In choices about experienced outcomes, individuals show risk seeking for gains and risk aversion for losses. This change in the direction of gain-loss asymmetry is known as the description-experience gap. Across eight experiments, we examined gain-loss asymmetry in two experiential choice procedures. We compared the obtained results with predictions derived from Prospect Theory and the description-experience gap literature.  In Study 1, we evaluated the predictions of the reversed reflection effect in probability discounting. Probability discounting is loss in reinforcer value as a function of uncertainty. In typical tasks measuring discounting, participants choose between smaller, certain amounts and a larger amount at one of several probabilities. In choice from description, most participants show a gain-loss asymmetry consistent with the predictions of the reflection effect, discounting gains more steeply than losses. Across three experiments, we examined whether gain-loss asymmetry also occurred when participants experienced the outcomes they chose, when they chose between two uncertain options, and when these two contexts were combined. Across all of the above contexts, no consistent mean difference in discounting of gains and losses was observed. Rather, in most of the tasks that provided experienced outcomes, the participants showed steeper discounting in the first condition completed, whether it involved choices about gains or losses. Furthermore, subsequent conditions produced shallower discounting, but notably, not shallower than choice based on the expected value of the options. In Studies 2 and 3, we followed-up on this order effect by providing the participants with experience of probabilistic outcomes before the discounting tasks. Participants discounted losses more steeply than gains, consistent with the predictions of a reversed reflection effect.  In Study 2, we examined gain-loss asymmetry in a rapid-acquisition choice procedure using concurrent variable-interval schedules – the Auckland Card Task. Participants repeatedly chose between two decks of cards that varied in the frequency or magnitude of available gains or losses. Participants were more sensitive to changes in gain than loss frequency between the two decks, consistent with the predictions of a reversed reflection effect, while sensitivity to gain and loss magnitude did not show an asymmetry. We found a novel asymmetry in the local effects of gains and losses. In the frequency tasks, gains disrupted the general pattern of responding more than losses. In the magnitude tasks, varying the magnitude of losses had a bigger effect on local-level patterns following outcomes than varying the magnitude of gains.  Across the two tasks we observed patterns of gain-loss asymmetry consistent with the predictions of a reversed reflection effect. We also observed several inconsistencies, particularly when comparing behaviour to choices that would maximize the expected returns. Our research suggested that sufficient exposure to chance outcomes and ensuring delivery of scheduled events are key challenges in further refinement of experiential choice in human operant tasks.</p>

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