We propose a task for eliciting attitudes toward risk that is close to real-world risky decisions which typically involve gains and losses. The task consists of accepting or rejecting gambles that provide a gain with probability p\documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$p$$\end{document} and a loss with probability 1-p\documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$1-p$$\end{document}. We employ finite mixture models to uncover heterogeneity in risk preferences and find that behavior is heterogeneous, with one half (...) of the subjects behaving as expected utility maximizers, for the others, reference-dependent models perform better than those where subjects derive utility from final outcomes, models with sign-dependent decision weights perform better than those without, and there is no evidence for loss aversion. The procedure is sufficiently simple so that it can be easily used in field or lab experiments where risk elicitation is not the main experiment. (shrink)

Prominent theories of decision under risk that challenge expected utility theory model risk attitudes at least partly with transformation of probabilities. This paper shows how attributing local risk aversion to attitudes towards probabilities can produce extreme probability distortions that imply paradoxical risk aversion.

Several experimental studies have reported that an otherwise robust regularity—the disparity between Willingness-To-Accept and Willingness-To-Pay—tends to be greatly reduced in repeated markets, posing a serious challenge to existing reference-dependent and reference-independent models alike. This article offers a new account of the evidence, based on the assumptions that individuals are affected by good and bad deals relative to the expected transaction price (price sensitivity), with bad deals having a larger impact on their utility (`bad-deal’ aversion). These features of preferences explain the (...) existing evidence better than alternative approaches, including the most recent developments of loss aversion models. (shrink)