A preference foundation for constant loss aversion

H.J.M. Peters

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

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.

Original languageEnglish
Pages (from-to)21-25
Number of pages5
JournalJournal of Mathematical Economics
Volume48
Issue number1
DOIs
Publication statusPublished - 1 Jan 2012

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