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Estimating Parametric Loss Aversion with Prospect Theory: Recognising and Dealing with Size Dependence

Balcombe, Kelvin, Bardsley, Nicholas, Dadzie, Sam, Fraser, Iain (2019) Estimating Parametric Loss Aversion with Prospect Theory: Recognising and Dealing with Size Dependence. Journal of Economic Behavior & Organization, 162 . pp. 106-119. ISSN 0167-2681. (doi:10.1016/j.jebo.2019.04.017) (KAR id:76737)

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Parameteric identification of loss aversion requires either the imposition of rotational symmetry on the utility function or a point dependent normalization condition. In this paper, we propose a new approach in which point dependence is reduced by integration over normalization points. To illustrate our approach, we consider a sample of Ghanaian farmers’ risk preferences over the gain, loss and mixed domains. Using Bayesian econometric methods, we find support for Prospect Theory albeit with substantial behavioral variation across individuals plus mild overweighting of losses compared to gains. We also show that the majority of respondents are mildly loss averse especially as the size of the payoffs increase.

Item Type: Article
DOI/Identification number: 10.1016/j.jebo.2019.04.017
Uncontrolled keywords: Prospect Theory; Loss Aversion; Hierarchical Bayes Methods. JEL: C93, D81, Q16
Subjects: H Social Sciences > HB Economic Theory
Divisions: Divisions > Division of Human and Social Sciences > School of Economics
Depositing User: Iain Fraser
Date Deposited: 23 Sep 2019 13:03 UTC
Last Modified: 16 Feb 2021 14:07 UTC
Resource URI: (The current URI for this page, for reference purposes)
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