Additive Utility in Prospect Theory

  • Authors:

  • Han Bleichrodt;Ulrich Schmidt;Horst Zank

  • Affiliations:

  • Erasmus School of Economics, Erasmus University, 3000 DR Rotterdam, The Netherlands;Kiel Institute for the World Economy and Department of Economics, University of Kiel, 24098 Kiel, Germany;Economics, School of Social Sciences, University of Manchester, Manchester M13 9PL, United Kingdom

  • Venue:
  • Management Science
  • Year:
  • 2009

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Abstract

Prospect theory is currently the main descriptive theory of decision under uncertainty. It generalizes expected utility by introducing nonlinear decision weighting and loss aversion. A difficulty in the study of multiattribute utility under prospect theory is to determine when an attribute yields a gain or a loss. One possibility, adopted in the theoretical literature on multiattribute utility under prospect theory, is to assume that a decision maker determines whether the complete outcome is a gain or a loss. In this holistic evaluation, decision weighting and loss aversion are general and attribute-independent. Another possibility, more common in the empirical literature, is to assume that a decision maker has a reference point for each attribute. We give preference foundations for this attribute-specific evaluation where decision weighting and loss aversion are depending on the attributes.