Too Risk-Averse for Prospect Theory?

Abstract

We observe that the standard variant of Prospect Theory cannot describe very risk-averse choices in simple lotteries. This makes it difficult to accommodate it with experimental data. Using an exponential value function can solve this problem and allows to cover the whole spectrum of risk-averse behavior. Further evidence in favor of the exponential value function comes from the evaluation of data from a large scale survey on preferences over lotteries where the exponential value function produces the best fits. The results enhance the understanding on what types of lotteries pose potential problems for the classical value function.