Prospect Theory in the Health Domain: A Quantitative Assessment

Posted: 1 Feb 2013 Last revised: 14 Aug 2017

See all articles by Arthur E. Attema

Arthur E. Attema

Erasmus University Rotterdam (EUR)

Werner Brouwer

Erasmus University Rotterdam (EUR) - Erasmus Medical Center (MC)

Olivier l'Haridon

Ecole Normale Superieure de Cachan - Group of research on the Risk, Information and the Decision (GRID); Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA)

Date Written: August 13, 2013

Abstract

It is well-known that expected utility (EU) has empirical deficiencies. Cumulative prospect theory (CPT) has developed as an alternative with more descriptive validity. However, CPT’s full function had not yet been quantified in the health domain. This paper is therefore the first to simultaneously measure utility of life duration, probability weighting, and loss aversion in this domain.

We observe loss aversion and risk aversion for gains and losses, which for gains can be explained by probabilistic pessimism. Utility for gains is almost linear. For losses, we find less weighting of probability 1/2 and concave utility. This contrasts with the common finding of convex utility for monetary losses. However, CPT was proposed to explain choices among lotteries involving monetary outcomes. Life years are arguably very different from monetary outcomes and need not generate convex utility for losses. Moreover, utility of life duration reflects discounting, causing concave utility.

Keywords: loss aversion, cumulative prospect theory, QALY model, utility of life duration

JEL Classification: B40, I10

Suggested Citation

Attema, Arthur E. and Brouwer, Werner and L'Haridon, Olivier, Prospect Theory in the Health Domain: A Quantitative Assessment (August 13, 2013). Available at SSRN: https://ssrn.com/abstract=2209845 or http://dx.doi.org/10.2139/ssrn.2209845

Arthur E. Attema (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

HOME PAGE: http://https://sites.google.com/site/arthurattema/home

Werner Brouwer

Erasmus University Rotterdam (EUR) - Erasmus Medical Center (MC) ( email )

Doctor Molewaterplein 40
Rotterdam, South Holland 3015 GD
Netherlands

Olivier L'Haridon

Ecole Normale Superieure de Cachan - Group of research on the Risk, Information and the Decision (GRID) ( email )

61 Avenue du President Wilson
94235 Cachan
France

Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA)

106-112 Boulevard de l'Hopital
Paris Cedex 13, 75647
France

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