Journal
JOURNAL OF MATHEMATICAL ECONOMICS
Volume 48, Issue 1, Pages 21-25Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jmateco.2011.11.003
Keywords
Decision making under risk; Reference outcome; Loss aversion
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Following prospect theory and in particular the concept of loss aversion, introduced by Kahneman and Tversky (1979), we consider decision making under risk in which the decision maker's preferences depend on a reference outcome. An outcome below this reference outcome is regarded as resulting from a loss: a loss decreases the decision maker's basic utility more than a comparable gain increases this utility. An elegant and simple way to model this phenomenon was proposed by Shalev (2002): the utility of an outcome below the reference outcome is obtained from the basic utility by subtracting a multiple of the loss in basic utility: this multiple, the loss aversion coefficient, is constant across different reference outcomes. We provide a preference foundation for this loss aversion model. (C) 2011 Elsevier B.V. All rights reserved.
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