Please use this identifier to cite or link to this item: http://hdl.handle.net/2381/43585
Title: Losses Loom Larger Than Gains and Reference Dependence in Bernoulli’s Utility Function
Authors: Charles-Cadogan, Godfrey
First Published: 5-Sep-2018
Publisher: Elsevier
Citation: Journal of Economic Behavior and Organization
Abstract: Some analysts claim that Bernoulli’s utility function is “reference-independent”, so it is not able to generate a loss aversion index, and that the theoretical framework of Prospect Theory (PT) is required to achieve those results. This paper examines that claim and finds that the geometry of Bernoulli’s original utility function specification either explains or implies key elements of PT: reference dependence and a loss aversion index. Theory and evidence show that the loss aversion index constructed from reference wealth in Bernoulli’s utility specification is in the domain of attraction of a stable law. That is, its distribution is a slow varying function with a fat tail that decays like a power law. Additionally, the index can be tested with a modified Fisher z-transform test. Bernoulli‘s utility function also sheds light on why loss aversion may be over-estimated under PT. In a nutshell, Bernoulli’s utility function is alive and well.
ISSN: 0167-2681
Links: https://www.sciencedirect.com/science/article/pii/S0167268118302129
http://hdl.handle.net/2381/43585
Embargo on file until: 5-Mar-2020
Version: Post-print
Status: Peer-reviewed
Type: Journal Article
Rights: Copyright © 2018, Elsevier. Deposited with reference to the publisher’s open access archiving policy. (http://www.rioxx.net/licenses/all-rights-reserved)
Description: The file associated with this record is under embargo until 18 months after publication, in accordance with the publisher's self-archiving policy. The full text may be available through the publisher links provided above.
Appears in Collections:Published Articles, Dept. of Economics

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