Solving the St. Petersburg Paradox in cumulative prospect theory: the right amount of probability weighting
| Autor: | Marie Pfiffelmann |
|---|---|
| Rok vydání: | 2010 |
| Předmět: |
Risk analysis
Weight function Cumulative prospect theory Operations research business.industry General Social Sciences General Decision Sciences Computer Science Applications Zero (linguistics) Weighting Arts and Humanities (miscellaneous) Prospect theory Developmental and Educational Psychology St. Petersburg paradox business General Economics Econometrics and Finance Mathematical economics Applied Psychology Risk management Mathematics |
| Zdroj: | Theory and Decision. 71:325-341 |
| ISSN: | 1573-7187 0040-5833 |
| DOI: | 10.1007/s11238-009-9191-x |
| Popis: | Cumulative Prospect Theory (CPT) does not explain the St. Petersburg Paradox. We show that the solutions related to probability weighting proposed to solve this paradox, (Blavatskyy, Management Science 51:677–678, 2005; Rieger and Wang, Economic Theory 28:665–679, 2006) have to cope with limitations. In that framework, CPT fails to accommodate both gambling and insurance behavior. We suggest replacing the weighting functions generally proposed in the literature by another specification which respects the following properties: (1) to solve the paradox, the slope at zero has to be finite. (2) to account for the fourfold pattern of risk attitudes, the probability weighting has to be strong enough. |
| Databáze: | OpenAIRE |
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