Further Reflections on Prospect Theory

Abstract

A menu of paired lottery choices is structured so that the crossover point to the high-risk lottery can be used to infer the degree of risk aversion or preference. When payoffs are hypothetical and gains are transformed into losses by reflecting them around zero, more than half of the subjects exhibit a effect (risk aversion for gains and risk seeking for losses). With cash payoffs, however, this pattern is not observed; many subjects exhibit risk aversion for both gains and losses, and the frequency of reflection (about ten percent) is not much greater than the frequency of reverse reflection (risk seeking for gains and risk aversion for losses). Risk aversion is, however, less common in the loss domain.