Understanding Risk Attitudes in two Dimensions: An Experimental Analysis

Despite extensive studies, the nature of risk attitudes remains a vigorously discussedquestion in economics and psychology. In expected utility theory, attitudes towardsrisk originate from changes in marginal utility. Cumulative prospect theory (CPT)adds an additional dimension: the weighting of probabilities. By examining bothdimensions, we strive to gain more insight on the relation between the curvature ofutility function and probability weighting, and on possible relations to cognitivelimitations. Our findings from a controlled laboratory experiment suggest that the twodimensions capture quite different characteristics. Though, most individuals exhibitconcave utility and convex probability weighting, the two dimensions show nosignificant correlation. In addition, only probability weighting, not the curvature ofutility function, is correlated with educational background and decision time, whichsuggests its relation to cognitive limitations. ISSN 1993-4378 (Print)ISSN 1993-6885 (Online)