Risk Aversion in Cumulative Prospect Theory
Management Science · 2008 · Volume 54 · Issue 1
Abstract
This paper characterizes the conditions for strong risk aversion and second-order 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.
Keywords
cumulative prospect theory, loss aversion, risk aversion, second-order stochastic dominance, decision analysis theory, risk
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