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Unformatted text preview: Overview Loss Aversion Diminishing Sensitivity Nonlinear Probability Weighting Modeling Referencedependent Utility Introduction to Prospect Theory January 6, 2011 Overview Loss Aversion Diminishing Sensitivity Nonlinear Probability Weighting Modeling Referencedependent Utility Introduction to Prospect Theory Social scientists look for parsimonious models that predict human behavior Prospect Theory (KT, 1979) is a descriptive model One of the most widely cited and influential social science papers ever published Overview Loss Aversion Diminishing Sensitivity Nonlinear Probability Weighting Modeling Referencedependent Utility Overview Today: Features of PT Motivate/examine evidence Begin modeling approach Tuesday: Modeling referencedependent preferences Examples Calibrating risk attitudes Weaknesses Overview Loss Aversion Diminishing Sensitivity Nonlinear Probability Weighting Modeling Referencedependent Utility Features of Prospect Theory Referencedependent preferences: u ( c t  r t ), not u ( c t ); r t is some reference level. (For now: status quo ante) Loss aversion Diminishing sensitivity Nonlinear probability weighting EU: probabilities enter linearly PT: enter as decision weights via weighting function Overview Loss Aversion Diminishing Sensitivity Nonlinear Probability Weighting Modeling Referencedependent Utility Loss Aversion: Losses &amp; Gains Matter Summary of evidence Endowment effects Surveys/experiments on risk DMU ( w ) cannot explain risk aversion Overview Loss Aversion Diminishing Sensitivity Nonlinear Probability Weighting Modeling Referencedependent Utility Loss Aversion Endowment effect: KKT...
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This note was uploaded on 12/26/2011 for the course ECON 227A taught by Professor Grossman during the Fall '09 term at UCSB.
 Fall '09
 GROSSMAN
 Utility

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