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We take Cumulative Prospect Theory (CPT) seriously by rigorously estimating structural models using the full set of CPT parameters. Much of the literature only estimates a subset of CPT parameters, or more simply assumes CPT parameter values from prior studies. Our data are from laboratory experiments with undergraduate students and MBA students facing substantial real incentives and losses. We also estimate structural models from Expected Utility Theory (EUT), Dual Theory (DT), Rank-Dependent Utility (RDU), and Disappointment Aversion (DA) for comparison. Our major finding is that a majority of individuals in our sample locally asset integrate. That is, they see a loss frame for what it is, a frame, and behave as if they evaluate the net payment rather than the gross loss when one is presented to them. This finding is devastating to the direct application of CPT to these data for those subjects. Support for CPT is greater when losses are covered out of an earned endowment rather than house money, but RDU is still the best single characterization of individual and pooled choices. Defenders of the CPT model claim, correctly, that the CPT model exists “because the data says it should.” In other words, the CPT model was borne from a wide range of stylized facts culled from parts of the cognitive psychology literature. If one is to take the CPT model seriously and rigorously then it needs to do a much better job of explaining the data than we see here.

We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the strengths and weaknesses of alternative estimation procedures, and finally the effect of controlling for risk attitudes on inferences in experiments.

This paper studies the empirical application of an asset pricing model derived from the irrational individual behavior of loss aversion. Previous research using loss aversion asset pricing finds conclusive evidence that estimations match market equity premium and volatility using simulation data. We find that within its empirical application, the estimated errors are comparable to errors estimated from the capital asset pricing model. This study of the correlations between rational and irrational asset pricing model from the empirical results finds validity for both estimated values. Finally, we see the importance of cultures, economic development and financial development on asset pricing through an empirical examination of five pacific-basin countries in the estimation of asset pricing models.

This paper reports a new experimental test of the notion that behavior switches from risk averse to risk seeking when gains are “reflected” into the loss domain. We conduct a sequence of experiments that allows us to directly compare choices under reflected gains and losses where real and hypothetical payoffs range from several dollars to over $100. Lotteries with positive payoffs are transformed into lotteries over losses by multiplying all payoffs by –1, that is, by reflecting payoffs around zero. When we use hypothetical payments, more than half of the subjects who are risk averse for gains turn out to be risk seeking for losses. This reflection effect is diminished considerably with cash payoffs, where the modal choice pattern is to exhibit risk aversion for both gains and losses. However, we do observe a significant difference in risk attitudes between losses (where most subjects are approximately risk neutral) and gains (where most subjects are risk averse). Reflection rates are further reduced when payoffs are scaled up by a factor of 15 (for both real and hypothetical payoffs).

Behavioral economics poses a challenge for the welfare evaluation of choices, particularly those that involve risk. It demands that we recognize that the descriptive account of behavior toward those choices might not be the ones we were all taught, and still teach, and that subjective risk perceptions might not accord with expert assessments of probabilities. In addition to these challenges, we are faced with the need to jettison naive notions of revealed preferences, according to which every choice by a subject expresses her objective function, as behavioral evidence forces us to confront pervasive inconsistencies and noise in a typical individual’s choice data. A principled account of errant choice must be built into models used for identification and estimation. These challenges demand close attention to the methodological claims often used to justify policy interventions. They also require, we argue, closer attention by economists to relevant contributions from cognitive science. We propose that a quantitative application of the “intentional stance” of Dennett provides a coherent, attractive and general approach to behavioral welfare economics.

Law enforcement agents enforce rules that they might transgress in their private lives. Building from a theory of “hypocrisy aversion” where agents incur psychological costs from imposing a sanction on others for rules that they might break, the authors design a two-player game in which players are simultaneously placed in the roles of enforcer and potential transgressor. In this model, discretionary enforcement is endogenous to the size of the sanction. Conditional on rewards to enforcement and punishment that are both sufficiently small in the status quo, the authors demonstrate that price effects can be dominated by second-order hypocrisy effects, leading to rates of transgression that increase with larger sanctions. The authors test the model within a laboratory experiment where individuals can simultaneously gamble at the expense of a third party and punish those they observe gambling. Examining the comparable testable predictions of models of (i) selfish agents, (ii) pro-social agents, and (iii) pro-social agents who are averse to hypocrisy, the authors find evidence of hypocrisy aversion in the rates of gambling, sanctioning, and the changing composition of agent strategies. Our results suggest that increasing sanctions can backfire in the deterrence of common criminal and non-criminal offenses.

Within developing countries, particularly in Africa, there is an emerging literature which highlights the unique obstacles faced by women entrepreneurs who start and develop their own businesses (De Vita, Mari, & Poggesi, 2014; Jamali, 2009; Minniti & Naude, 2010; Naude & Havenga, 2005; Nziku & Struthers, 2018). A key objective of this chapter is to critically appraise some of the conceptual approaches adopted in this literature. In so doing, the authors revisit a seminal paper first developed by Granovetter (1973) which suggested that female entrepreneurs, instead of being disadvantaged by the so-called ‘weak ties’ that bind their business networks, actually enjoy compensating benefits which Granovetter referred to as the strength of weak ties (SWT). Building on the conceptual work of Nziku and Struthers (2018) which developed an innovative taxonomy for analysing the SWT concept within a Principal-Agent (P-A) paradigm, the chapter will set out new insights which challenge some of the assumptions of the extant entrepreneurship literature. In particular, that women are inherently more risk averse in their business decision making than men. The theoretical context for this will be derived from a behavioural economics methodology first developed by Kahneman and Tversky (1979). They introduced the concept of loss aversion as a more realistic approach to attitudes towards risk on the part of entrepreneurs than risk aversion. The chapter contends that the loss aversion perspective may be more appropriate to the decision-making frame adopted by female entrepreneurs, especially in the context of Africa as well as in other developing regions of the world. The chapter will therefore suggest that such an approach can yield fresh insights on the topic of female entrepreneurship which the extant literature heretofore has not addressed, though this will have to be subsequently tested empirically.

This study explores how balanced scorecard format and reputation from environmental performances interact to influence performance evaluations.

Two general options exist for inserting environmental measures into a scorecard: embedded among the four traditional perspectives or grouped in a fifth perspective. Prior balanced scorecard research also assumes negative past environmental performances. In such settings, and when low management communication levels exist on the importance of environmental strategic objectives (a common practitioner scenario), environmental measures receive less decision weight when they are grouped in a fifth scorecard perspective. However, a positive environmental reputation would generate loss aversion concerns with reputation, leading to more decision weight given to environmental measures. Participants (N=138) evaluated performances with scorecards in an experimental design that manipulates scorecard format (four, five-perspectives) and past environmental performance operationalizing reputation (positive, negative).

The environmental reputation valence’s impact is more (less) pronounced when environmental measures are grouped (embedded) in a fifth perspective (among the four traditional perspectives), when the environmental feature of the measures is more (less) salient.

Findings provide the literature with original empirical results that support the popular, but often anecdotal, position of advocating a fifth perspective for environmental measures to help emphasize and promote environmental stewardship within an entity when common low management communication levels exist. Specifically, when positive past environmental performances exist, entities may choose to group environmental performance measures together in a fifth scorecard perspective without risking those measures receiving the discounted decision weight indicated in prior studies.