Estimation of the Utility Function of Money and Housing Based on the Cumulative Prospect Theory

Abstract

This article addresses the issue of the utility of money and the utility of housing with a value equivalent to that amount of money. The literature provides many reports on the shape of the utility function for money, but much less research has been devoted to the utility function for housing. The aim of this study was to estimate the utility function of money and housing according to the cumulative prospect theory (CPT) developed by Tversky and Kahneman (1992). Parameters alpha (α), beta (β), and lambda (λ) were estimated to compare the utility value of money and housing. The most important conclusions of the study are as follows: parameters alpha and beta were greater than 0 and less than 1 for both housing and money. Function v(x) was concave in the gain domain and convex in the loss domain, which is consistent with the CPT. The differences in the lambda parameter denoting loss aversion were not significant, and the value of the utility function was somewhat higher for money than for housing. This study was undertaken to estimate the CPT parameters for housing, which, according to the authors’ best knowledge, has not been investigated to date.

Keywords

• utility function
• cumulative prospect theory
• certainty equivalent
• housing
• c93
• d10
• d81
• d91
• r21
• r29