Health Economics Seminars (EUR)

Olivier L’Haridon (Université of Rennes, France)
Thursday, 8 June 2017


It is well-known that expected utility has empirical deficiencies. Prospect theory has developed as an alternative with more descriptive validity. This study elicits utility of life duration in a framework that is robust to violations of expected utility. In addition, our method allows for a parameter-free measurement of loss aversion and probability weighting for both gains and losses. Finally, we are the first measure utility of life duration and event weighting in the case of uncertainty.

We conducted individual experiments where respondents had to make choices using health outcomes, which included a treatment with known probabilities and a treatment with unknown, imprecise, probabilities. First, when comparing these treatments, we found evidence for uncertainty aversion for mixed prospects. Despite this, the two treatments showed the same general pattern: concave utility for gains, convex utility for losses, and steeper utility for losses than for gains. Hence, our findings confirm the S-shaped utility that has often been observed for monetary outcomes. The amount of loss aversion was not significantly different between the treatments, with median loss aversion coefficients varying between 1.4 and 1.8 (depending on the specific definition used). The probability weighting functions showed the usual inverse S-shape, indicating overweighting of small probabilities and underweighting of large probabilities, both for gains and for losses. When comparing decision weights under risk and uncertainty, we found a significant difference for gains, but only for probability 0.5, the case of the classical Ellsberg urn. For losses, event weighting differed from probability weighting for small probabilities.

In conclusion, our data are supportive of prospect theory and source dependence in the health domain. Moreover, our findings suggest that differences between risk and uncertainty for life years is mainly due to difference in event weighting, especially for lost life years.