Decision under Conflict
Annual rept. no. 2, 1 Dec 1989-30 Nov 1990,
STANFORD UNIV CA DEPT OF PSYCHOLOGY
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The present report summarizes two projects. The first project, which focuses on riskless choice, involves a series of experiments that demonstrate the phenomenon of loss aversion losses and disadvantages have greater impact on preference than gains and advantages. the evidence shows that choice depends on the status quo or reference level, and that changes of reference point often lead to reversals of preference. To account for these observations, we develop a reference-dependent theory of individual choice, which explains such effects by a deformation of the preference map about the reference point. Implications of loss aversion to both individual and aggregate behavior are explored. The second project, which focuses on decision under uncertainty, extends prospect theory by incorporating a cumulative i.e., rank-dependent weighting scheme. In this model, the carriers of value are gains and losses, defined relative to a reference point, and the impact of uncertainty is summarized by different weighting functions for gains or for losses. Two evaluation principles -- diminishing sensitivity and loss aversion -- are invoked to explain the characteristic curvature of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment reveal a distinctive four-fold pattern of risk attitudes risk aversion for gains and risk seeking for losses of high probability risk seeking for gains and risk aversion for losses of low probability.