Temporal Stability of Cumulative Prospect Theory

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.

Citation

Lau, M.I., Yoo, H.I. and Zhao, H. (2023), "Temporal Stability of Cumulative Prospect Theory", Harrison, G.W. and Ross, D. (Ed.) Models of Risk Preferences: Descriptive and Normative Challenges (Research in Experimental Economics, Vol. 22), Emerald Publishing Limited, Leeds, pp. 193-226. https://doi.org/10.1108/S0193-230620230000022004