Disability Economics - General Experimental

Quality of Life and Prospect Theory

Prospect theory states that individuals view transactions relative to a fixed reference point.  Individuals are risk averse for gains (i.e., they would prefer $10 for sure over a 50/50 of winning $0 or $20) but risk loving over losses (i.e., they would prefer a 50/50 ‘lottery’ of losing $0 or $20 over a sure loss of $10.  But are findings for individual preferences for monetary outcomes relevant for patient preferences over quality of life states?

This is the question examined by Attema et al. (2016) using a survey methodology.  They find that:

…health is a fundamentally different commodity than money, with a positive correlation between concavity for gains and for losses. Instead, ‘diminishing sensitivity’ or reflection at the individual level, with a positive correlation between concavity of utility for gains and convexity for losses,is often found in the monetary domain.

Hmmm….that is pretty confusing. Can you give me an example?

For example, people mayevaluate a loss of $11,000 as similar to a loss of $10,000, since the additional loss of $1000 is not perceived as making much of a difference in the context of an already large loss. However, the difference between $1000 and $2000 is perceived as large.

This makes sense.  If you are buying a care, a $500 increase in the price of a $30,000 care seems small, but a friend asking for a $500 loan seems very large.

How is health different?

In the health domain, with 60% as reference point, convexity would mean that a loss from 60% to 40% of QoL would be perceived as much“larger” than a loss from 40% to 20%. We observed the opposite in our experiments: the loss from 60% to 40% was perceived as smaller than the loss from 40% to 20%.


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