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Behavior in the loss domain: An experiment using the probability trade-off consistency condition

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  • L'Haridon, Olivier

Abstract

In gambles with two or more outcomes, the two versions of prospect theory, i.e., original prospect theory and cumulative prospect theory, make use of different composition rules and therefore yield different valuations of gambles. We test these composition rules in the loss domain using the probability trade-off consistency condition. The probability trade-off consistency condition offers a convenient and efficient way to compare gambles under risk and decision makers' behavior. Experimental findings suggest that the rank dependent version of prospect theory, or cumulative prospect theory, cannot be rejected in the loss domain while original prospect theory is clearly rejected when a certainty effect is taken into account.

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  • L'Haridon, Olivier, 2009. "Behavior in the loss domain: An experiment using the probability trade-off consistency condition," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 540-551, August.
    • Handle: RePEc:eee:joepsy:v:30:y:2009:i:4:p:540-551
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    Cited by:

    1. Jean Desrochers & J. Francois Outreville, 2013. "Uncertainty, Ambiguity and Risk Taking: an experimental investigation of consumer behavior and demand for insurance," ICER Working Papers 10-2013, ICER - International Centre for Economic Research.
    2. Horst Zank, 2010. "On probabilities and loss aversion," Theory and Decision, Springer, vol. 68(3), pages 243-261, March.
    3. Wakker, Peter P., 2023. "A criticism of Bernheim & Sprenger's (2020) tests of rank dependence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 107(C).

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