Temporal Stability of Cumulative Prospect Theory

Morten I Lau, Hong Il Yoo, Hongming Zhao

Research output: Chapter in Book/Report/Conference proceedingBook chapterResearchpeer-review

Abstract

We evaluate the hypothesis of temporal stability in risk preferences using two recent data sets from longitudinal lab experiments. Both experiments included a combination of decision tasks that allows one to identify a full set of structural parameters characterizing risk preferences under Cumulative Prospect Theory (CPT), including loss aversion. We consider temporal stability in those structural parameters at both population and individual levels. The population-level stability pertains to whether the distribution of risk preferences across individuals in the subject population remains stable over time. The individual-level stability pertains to within-individual correlation in risk preferences over time. We embed the CPT structure in a random coefficient model that allows us to evaluate temporal stability at both levels in a coherent manner, without having to switch between different sets of models to draw inferences at a specific level.
Original languageEnglish
Title of host publicationModels of Risk Preferences : Descriptive and Normative Challenges
EditorsGlenn W. Harrison, Don Ross
Number of pages34
Place of PublicationLeeds
PublisherEmerald Group Publishing
Publication date2023
Pages193-226
Chapter4
ISBN (Print)9781837972692
ISBN (Electronic)9781837972685, 9781837972708
DOIs
Publication statusPublished - 2023
SeriesResearch in Experimental Economics
Volume22
ISSN0193-2306

Keywords

  • Cumulative prospect theory
  • Risk preferences
  • Temporal stability
  • Laboratory experiment
  • Random coefficient
  • Maximum simulated likelihood

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