Prospect Theory: For Risk and Ambiguity, provides a comprehensive and accessible textbook treatment of the way decisions are made both when we have the statistical probabilities associated with uncertain future events and when we lack them. The book presents models, primarily prospect theory, that are both tractable and psychologically realistic. A method of presentation is chosen that makes the empirical meaning of each theoretical model completely transparent. Prospect theory has many applications in a wide variety of disciplines. The material in (...) the book has been carefully organized to allow readers to select pathways through the book relevant to their own interests. With numerous exercises and worked examples, the book is ideally suited to the needs of students taking courses in decision theory in economics, mathematics, finance, psychology, management science, health, computer science, Bayesian statistics, and engineering. (shrink)

We obtain rich measures of the risk preferences of a sample of Vietnamese farmers, and revisit the link between risk preferences and economic well-being. Far from being particularly risk averse, our farmers are on average risk neutral and, thus, more risk tolerant than typical Western subject populations. This generalises recent findings indicating that students in poorer countries are more risk tolerant than students in richer countries to a general population sample. Risk aversion is, furthermore, negatively correlated with income within our (...) sample, but does not correlate with wealth. This also casts doubt on high levels of risk aversion causing failure to adopt new technologies, which we discuss. (shrink)

In binary choice between discrete outcome lotteries, an individual may prefer lottery L1 to lottery L2 when the probability that L1 delivers a better outcome than L2 is higher than the probability that L2 delivers a better outcome than L1. Such a preference can be rationalized by three standard axioms (solvability, convexity and symmetry) and one less standard axiom (a fanning-in). A preference for the most probable winner can be represented by a skew-symmetric bilinear utility function. Such a utility function (...) has the structure of a regret theory when lottery outcomes are perceived as ordinal and the assumption of regret aversion is replaced with a preference for a win. The empirical evidence supporting the proposed system of axioms is discussed. (shrink)

Risk attitude is known to be a key determinant of various economic and financial choices. Behavioral studies that aim to evaluate the role of risk attitudes in contexts of this type, therefore, require tools for measuring individual risk tolerance. Recent developments in decision theory provide such tools. However, the methods available can be time consuming. As a result, some practitioners might have an incentive to prefer “fast and frugal” methods to clean but more costly methods. In this article, we focus (...) on a tractable procedure initially proposed by Holt and Laury (2002) to elicit risk attitude. We generalize this method to measure utility and risk aversion as follows. First, we allow measurement of probabilistic risk attitude through violations of expected utility due to probability weighting. Second, we use the outcome scale rather than the probability scale in the menu of choices. Third, we compare sure payoffs with lotteries instead of comparing non-degenerate lotteries. A within-subject experimental study illustrates the gains in tractability and bias minimization that can result from such an extension. (shrink)