Diminishing Utility, Loss Aversion, and Framing Effect in Financial Decission Making

Abstract

This paper shows the effect of individual characteristics to individual’s disposition to experience diminishing utility and loss aversion during decission making process according to Prospect Theory. Participants of this study are undergraduate students in an Indonesian private university. Individual characteristics studied are GPA, semester level, wheter participant is majoring in economic, sex, and whether participant has ever taken statistic subject. The level of diminishing utility and loss aversion is measured by asking participants to assign values to gambles with various outcomes and odds. The assigned values are then plotted to Utility-Value function according to Prospect Theory using MyCurveFit software. Level of diminishing utility and loss aversion of each participant can then be calculated. It is found that GPA is positively while semester level is negatively related to level of diminishing utility both in profit and loss situation. Major has no effect to diminishing utility. Female participants show bigger effect of diminishing utility compared to male participants. Statistic subject makes no difference on level of diminishing utility. For level of loss aversion effect, only statistic subject makes any significant effect to participants.

Keywords: Prospect Theory, Diminishing Utility, Loss Aversion, Decission Making, Risky Choice