Journal Article

Risk Aversion in Cumulative Prospect Theory

Authors

  • H. Zank
  • Ulrich Schmidt
Publication Date

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.

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Info

JEL Classification
D81

Key Words

  • cumulative prospect theory
  • decision analysis theory
  • loss aversion
  • risk
  • risk aversion
  • second-order stochastic dominance