A test of competing explanations of compensation demanded

We find that prospect theory behavior is significantly more prevalent than utility theory behavior in experiments involving multiple, real items. In t he experiments, subjects were endowed with three items and asked the minimu m payments they required to be willing to return one, two, or three of them . Our key observation is that prospect theory implies concavity of compensa tion demanded, whereas utility theory implies convexity. We examine whether the compensation demanded is convex or concave in the number of items retu rned. (JEL C91).