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Additive Utility in Prospect Theory

Erasmus School of Economics, Erasmus University, 3000 DR Rotterdam, The Netherlands
Kiel Institute for the World Economy and Department of Economics, University of Kiel, 24098 Kiel, Germany
Economics, School of Social Sciences, University of Manchester, Manchester M13 9PL, United Kingdom
bleichrodt{at}ese.eur.nl
uschmidt{at}bwl.uni-kiel.de
horst.zank{at}manchester.ac.uk

Prospect theory is currently the main descriptive theory of decision under uncertainty. It generalizes expected utility by introducing nonlinear decision weighting and loss aversion. A difficulty in the study of multiattribute utility under prospect theory is to determine when an attribute yields a gain or a loss. One possibility, adopted in the theoretical literature on multiattribute utility under prospect theory, is to assume that a decision maker determines whether the complete outcome is a gain or a loss. In this holistic evaluation, decision weighting and loss aversion are general and attribute-independent. Another possibility, more common in the empirical literature, is to assume that a decision maker has a reference point for each attribute. We give preference foundations for this attribute-specific evaluation where decision weighting and loss aversion are depending on the attributes.

Key Words: additive utility; prospect theory; decision weighting; loss aversion
History: Received: March 5, 2008; accepted: December 1, 2008.