Relating the two Dimensions of Risk Attitudes: An Experimental Analysis

Abstract

In the framework of expected utility theory, risk attitudes are entirely captured\nby the curvature of the utility function. In cumulative prospect theory (CPT) risk\nattitudes have an additional dimension: the weighting of probabilities. With this\nmodi cation, one question arises naturally: since both utility and probability weight-\ning determine the attitude towards risk, what is the relation between them? We\nran a controlled laboratory experiment to answer this question. Our ndings suggest\nthat the two dimensions capture di erent characteristics of individual risk attitude.\nThough individuals who are risk averse in one dimension are likely to be risk averse in\nthe other, the two dimensions show no signi cant correlation. Moreover, a signi cant\nproportion of subjects are risk averse in one dimension but risk seeking in the other.

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