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Loss Aversion Under Prospect Theory: A Parameter-Free Measurement

CNRS–GREGHEC and HEC School of Management, Paris, F-78350 Jouy-en-Josas, France
Department of Economics, Erasmus University, 3000 DR Rotterdam, The Netherlands
Université de Paris V and GREGHEC, Paris, F-78350 Jouy-en-Josas, France
abdellaoui{at}hec.fr
bleichrodt{at}few.eur.nl
paraschiv{at}hec.fr

Agrowing body of qualitative evidence shows that loss aversion, a phenomenon formalized in prospect theory, can explain a variety of field and experimental data. Quantifications of loss aversion are, however, hindered by the absence of a general preference-based method to elicit the utility for gains and losses simultaneously. This paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions. Thus, it is the first to obtain a parameter-free elicitation of prospect theory's utility function on the whole domain. Our method also provides an efficient way to elicit utility midpoints, which are important in axiomatizations of utility. Several definitions of loss aversion have been put forward in the literature. According to most definitions we find strong evidence of loss aversion, at both the aggregate and the individual level. The degree of loss aversion varies with the definition used, which underlines the need for a commonly accepted definition of loss aversion.

Key Words: prospect theory; loss aversion; utility for gains and losses; elicitation of midpoints
History: Received: February 16, 2006;

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