Document Type
Article
Publication Date
2-1-2005
Abstract
This paper reports a new experimental test of prospect theory’s reflection effect. We conduct a sequence of experiments that allow us to directly compare choices under reflected gains and losses where real and hypothetical payoffs range from several dollars to over $100. Lotteries with positive payoffs are transformed into lotteries over losses by reflecting all payoffs around zero. When we use hypothetical payments, more than half of the subjects who are risk averse for gains turn out to be risk seeking for losses. This “reflection effect” is diminished considerably with cash payoffs, where the modal choice pattern is to exhibit risk aversion for both gains and losses. However, we do observe a significant difference in risk attitudes between losses (where most subjects are approximately risk neutral) and gains (where most subjects are risk averse). Reflection rates are further reduced when payoffs are scaled up by a factor of 15 (for both real and hypothetical payoffs).
Recommended Citation
Laury, Susan and Holt, Charles, "Further Reflections on Prospect Theory" (2005). ExCEN Working Papers. 146.
https://scholarworks.gsu.edu/excen_workingpapers/146
Comments
To learn more about the Andrew Young School of Policy Studies and ExCEN Working Papers Series, visit https://aysps.gsu.edu/ and http://excen.gsu.edu/center/.