Prospect theory, used descriptively for decisions under both risk and certainty, presumes concave utility over gains and convex utility over losses, a pattern widely seen in lottery tasks. Although such discontinuous gain-loss reference-dependence is also used to model riskless choices, only limited empirical evidence supports this use. In incentive-compatible experiments, we find that gain-loss reflection effects are not observed under riskless choice as predicted by prospect theory, even while in the same subjects gain-loss reflection effects are observed under risk. Our empirical results challenge the application of choice models across both risky and riskless domains.
Chung, Hui-Kuan, Paul Glimcher, and Agnieszka Tymula.
"An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and Expected Utility Theory."
American Economic Journal: Microeconomics,
Design of Experiments: Laboratory, Individual
Consumer Economics: Empirical Analysis
Criteria for Decision-Making under Risk and Uncertainty