Daniel Kahneman and Amos Tversky’s (1979) prospect theory, and the literature building from it, provide theories of risk attitudes based on a few regularities. Most importantly, evaluation of an outcome is influenced by how it compares to a reference point, with people exhibiting both a significantly greater aversion to losses than appreciation of gains, and a diminishing sensitivity to changes...

A standard requirement of rationality is that preferences obey stochastic dominance. In this paper, we investigate a new variety of dominance violation from the domain of uncertainty. We find that subjects systematically value a packed prospect, $x if one of two mutually exclusive events E1 or E2 obtains, less than an unpacked and dominated prospect, $x if E1 obtains, and $x−ε if E2 obtains. We...

The WTP-WTA gap refers to the often observed difference between the price an individual states he is willing to sell an item (WTA), and the price he states he is willing to pay for the same item (WTP). A common explanation for the gap is the so-called endowment effect, first proposed by Thaler (1980). In the literature the endowment effect is explained very simply by appealing to the concept of...