Non-Monotonicity of the Tversky-Kahneman Probability-Weighting Function: A Cautionary Note

Autor:	Jonathan E. Ingersoll
Rok vydání:	2008
Předmět:	Cumulative prospect theory Prospect theory Accounting Cumulative distribution function Econometrics Stochastic dominance Subjective expected utility Von Neumann–Morgenstern utility theorem General Economics Econometrics and Finance Expected utility hypothesis Mathematics Weighting
Zdroj:	European Financial Management. 14:385-390
ISSN:	1468-036X 1354-7798
Popis:	Cumulative Prospect Theory has gained a great deal of support as an alternative to Expected Utility Theory as it accounts for a number of anomalies in the observed behavior of economic agents. Expected Utility Theory uses a utility function and subjective or objective probabilities to compare risky prospects. Cumulative Prospect Theory alters both of these aspects. The concave utility function is replaced by a loss-averse utility function and probabilities are replaced by decision weights. The latter are determined with a weighting function applied to the cumulative probability of the outcomes. Several different probability weighting functions have been suggested. The two most popular are the original proposal of Tversky and Kahneman and the compound-invariant form proposed by Prelec. This note shows that the Tversky-Kahneman probability weighting function is not increasing for all parameter values and therefore can assign negative decision weights to some outcomes. This in turn implies that Cumulative Prospect Theory could make choices not consistent with first-order stochastic dominance.
Databáze:	OpenAIRE
Externí odkaz:	https://explore.openaire.eu/search/publication?articleId=doi_________::f69b4308e1509124d78db6f4063913b7 https://doi.org/10.1111/j.1468-036x.2007.00439.x Zobrazit plný text záznamu Plný text ve formátu PDF