Theories of choice under risk: Insights from financial markets

Doron Kliger, Ori Levy

Research output: Contribution to journalArticlepeer-review


To date, the plausibility of theories of choice under risk hinges are mainly on experimental evidence. This paper devises and implements an approach amenable of assessing the performance of three families of models (expected utility, rank-dependent expected utility, and the cumulative prospect theory) using information from financial asset markets. Our findings unequivocally support reference-point dependence, diminishing marginal sensitivity, loss aversion, and nonlinear weighting of (gain and loss) physical probabilities. The empirical observations are found to be robust to, inter alia, the parameterization of the utility and probability weighting functions, "day-of-the-week effects", the choice of a reference point, and the introduction of possible, low-probability market crashes (peso component).

Original languageEnglish
Pages (from-to)330-346
Number of pages17
JournalJournal of Economic Behavior and Organization
Issue number2
StatePublished - Aug 2009


  • Cumulative prospect theory
  • Expected utility
  • Market data
  • Rank-dependent expected utility

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management


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