A behavioral definition of loss aversion is proposed and its implications for original and cumulative prospect theory are analyzed. Original prospect theory is in agreement with the new loss aversion condition, and there utility is capturing all effects of loss aversion. In cumulative prospect theory loss aversion is captured by both the weighting functions and the utility function. Further, some restrictions apply for the weighting functions involved in the latter model.
Keywords prospect theory - loss aversion
We are indebted to Michèle Cohen and Peter Wakker for helpful comments. The suggestions of an anonymous referee have improved the presentation of the paper.