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Journal Article

Risk Aversion in Cumulative Prospect Theory

Authors

  • Zank
  • H.
  • Schmidt
  • U.

Publication Date

JEL Classification

D81

Key Words

cumulative prospect theory

decision analysis theory

loss aversion

risk

risk aversion

second-order stochastic dominance

This paper characterizes the conditions for strong risk aversion and secondorder stochastic dominance for cumulative prospect theory. Strong risk aversion implies a convex weighting function for gains and a concave one for losses. It does not necessarily imply a concave utility function. The latter does follow if the weighting functions are continuous. By investigating the exact relationship between loss aversion and strong risk aversion a natural index for the degree of loss aversion is derived.

Kiel Institute Expert

  • Prof. Dr. Dr. Ulrich Schmidt
    Research Director

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