The S-shaped utility function

The results generated by experimentalists in psychology and economics have led to numerous advances in the study of human decision making under risk. Camerer (1995) and Rabin (1998) provide excellent reviews of the relevant literature. These results clearly display the gap between normative theories of ideal behavior and descriptive theories of observed behavior. The most prominent result is loss aversion - the observation that a loss is given greater value than a gain of an equal size - and the resulting S-shaped utility function. Rabin puts the key point as follows: Researchers have identified a pervasive feature of reference dependence: In a wide variety of domains, people are significantly more averse to losses than they are attracted to same size gains (Rabin 1998, 13-14). In what follows, I will show that the wide variety of domains is wide indeed. In particular, I will review the effects of the S-shaped utility function on the resolution of the decision to commit a crime, to decision to violate professional ethics, and the decision to participate in a rebellion.