Review of Behavioral Economics > Vol 10 > Issue 4

COVID-19 Enhanced Diminishing Sensitivity in Prospect-Theory Risk Preferences: A Panel Analysis

Shinsuke Ikeda, Institute of Business and Accounting, Kwansei Gakuin University, and Institute of Social and Economic Research, Osaka University, Japan, ikeda@kwansei.ac.jp , Eiji Yamamura, Faculty of Economics, Seinan Gakuin University, Japan, yamaei@seinan-gu.ac.jp , Yoshiro Tsutsui, Faculty of Social Relations, Kyoto Bunkyo University, Japan, tsutsui@econ.osaka-u.ac.jp
 
Suggested Citation
Shinsuke Ikeda, Eiji Yamamura and Yoshiro Tsutsui (2023), "COVID-19 Enhanced Diminishing Sensitivity in Prospect-Theory Risk Preferences: A Panel Analysis", Review of Behavioral Economics: Vol. 10: No. 4, pp 287-313. http://dx.doi.org/10.1561/105.00000178

Publication Date: 21 Nov 2023
© 2023 S. Ikeda, E. Yamamura and Y. Tsutsui
 
Subjects
Behavioral economics,  Bounded rationality,  Psychology,  Behavioral finance
 
Keywords
JEL Codes: D90, G40
COVID-19prospect theoryriskvalue functionprobability weighting function
 

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Open Access

This is published under the terms of CC-BY.

In this article:
1. Introduction 
2. Literature Review 
3. Gap Analysis 
4. Theoretical Framework 
5. Methodology 
6. Findings 
7. Discussion 
8. Implications 
9. Limitations 
10. Conclusion 
References 

Abstract

Based on unique panel data from a five-wave internet survey in Japan, we show how the coronavirus disease 2019 (COVID-19) pandemic affects people’s prospect-theory risk preferences, especially in the loss domain. The panel analysis indicates that following the spread of the pandemic, diminishing sensitivity becomes stronger for the participants’ value and probability weighting functions. Therefore, owing to the pandemic, (i) people become less sensitive to an increase in losses and feel less displeasure owing to losses, especially large ones, and (ii) they become more pessimistic toward losses occurring with tiny probabilities, and more optimistic toward losses with larger probabilities. One implication of the study is that people become less cautious about the risks of suffering large losses with non-tiny probabilities, which may slow down the recovery of society.

DOI:10.1561/105.00000178

Online Appendix | 105.00000178_app.pdf

This is the article's accompanying appendix.

DOI: 10.1561/105.00000178_app