Risk Aversion in Cumulative Prospect Theory
This paper characterizes the conditions for strong risk aversion and secondorder stochastic dominance for cumulative prospect theory. Strong risk aversion implies a convex weighting function for gains and a concave one for losses. It does not necessarily imply a concave utility function. The latter does follow if the weighting functions are continuous. By investigating the exact relationship between loss aversion and strong risk aversion a natural index for the degree of loss aversion is derived.