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Advances in prospect theory: Cumulative representation of uncertainty

Advances in prospect theory: Cumulative representation of uncertainty We develop a new version of prospect theory that employs cumulative rather than separable decision weights and extends the theory in several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses. Two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment confirm a distinctive fourfold pattern of risk attitudes: risk aversion for gains and risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low probability. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Risk and Uncertainty Springer Journals

Advances in prospect theory: Cumulative representation of uncertainty

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References (59)

Publisher
Springer Journals
Copyright
Copyright
Subject
Economics; Economic Theory/Quantitative Economics/Mathematical Methods; Microeconomics; Operations Research/Decision Theory; Environmental Economics
ISSN
0895-5646
eISSN
1573-0476
DOI
10.1007/BF00122574
Publisher site
See Article on Publisher Site

Abstract

We develop a new version of prospect theory that employs cumulative rather than separable decision weights and extends the theory in several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses. Two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment confirm a distinctive fourfold pattern of risk attitudes: risk aversion for gains and risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low probability.

Journal

Journal of Risk and UncertaintySpringer Journals

Published: May 21, 2004

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