PROSPECT THEORY: UTILITY AND WEIGHTING FUNCTION ESTIMATION FOR AN ESPECIFIC SAMPLE

Abstract

Using Kahneman and Tversky’s (1979) prospect theory this paper investigates the utility function and the weighting function of economists from Pontifícia Universidade Católica do Rio Grande do Sul (PUCRS, Brazil) and, therefore, their risk behavior and compare them with the results found in the literature. For this purpose, an experiment was undertaken with students and professors from the Economic Department of PUCRS using a application method that is partially from Gonzalez and Wu (1999) and partially new, which allowed to minimize order effects and scales effects. With the participants answers we estimated the parameters of the utility function and of the weighting function of each individual. The results found show that economists from PUCRS have a distinct behavior of the average found in the economic literature; they have a more linear utility function and they discriminate the probabilities less than the results from the literature. The extension of the results suggests there are significant differences in behavior among the researched group accordingly with their demographic characteristics. Moreover, this paper has the additional purpose of contributing for the discussion in an area of growing importance and poorly developed in Brazil.