Additive utility in prospect theory

Abstract. Prospect theory is currently the main descriptive theory of decision under un-certainty. It generalizes expected utility by introducing nonlinear decision weighting and loss aversion. A difficulty in the study of multiattribute utility under prospect theory is to determine when an attribute yields a gain or a loss. One possibility, adopted in the theoretical literature on multiattribute utility under prospect theory, is to assume that a decision maker determines whether the complete outcome is a gain or a loss. In this holistic evaluation, decision weighting and loss aversion are general and attribute-independent. Another possibility, more common in the empirical literature, is to assume that a decision maker has a reference point for each at-tribute. We give preference foundations for this attribute-specific evaluation in which decision weighting and loss aversion are depending on the attributes. ∗Acknowledgements: Tony Marley, Peter P. Wakker, and two anonymous reviewers gave helpful com-ments. Han Bleichrodt’s research was made possible by a grant from the Netherlands Organization for