Prospect Theory: Shape of the Utility Function

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In prospect theory, three parameters determine the shape of the utility function in the domains of gain and loss:

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Loss aversion is represented by . The exponent determines the rate at which the marginal utility of gain decreases as the gain increases. The exponent determines the rate at which the marginal disutility of loss decreases as the loss increases.

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Contributed by: Arthur O'Sullivan (June 2019)
Open content licensed under CC BY-NC-SA


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Reference

[1] Wikipedia. "Prospect Theory." (Feb 21, 2019) en.wikipedia.org/wiki/Prospect_theory.


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