- An Index of Loss Aversion
- Journal of Economic Theory
- Volume | Issue number
- 122 | 1
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
- To a considerable extent, risk aversion as it is commonly observed is caused by loss aversion. Several indexes of loss aversion have been proposed in the literature. The one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components: basic utility, probability weighting, and loss aversion. The index is independent of the unit of payment. The main theorem shows how the indexes of different decision makers can be compared through observed choices.
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