A simple non-parametric method for eliciting prospect theory's value function and measuring loss aversion under risk and ambiguity (Q2243543)

This paper presents a new method for eliciting prospect theory's value function from observed decisions without auxiliary simplifying parametric assumptions. The method is applicable both to choice under ambiguity (Knightian uncertainty) and risk (when events are characterized by objective probabilities). Elicitation is implemented via an iterative multiple price list. The method was applied by eliciting preferences of a pool of 40 farmers from villages around the city of L'viv in western Ukraine. The collected data generally present an S-shaped value function (concave in the gain domain and convex in the loss domain) though there is a weaker loss aversion on the aggregate level and a substantial heterogeneity in loss aversion on the individual level.