Prospect theory for continuous distributions: A preference foundation
By Amit Kothiyal, Vitalie Spinu, Peter P. Wakker. 2011
60 citations recorded by the source corpus.
Preference foundations give necessary and sufficient conditions for a decision model, stated directly in terms of the empirical primitive: the preference relation. For the most popular descriptive model for decision making under risk and uncertainty today, prospect theory, preference foundations have as yet been provided only for prospects taking finitely many values. In applications, however, prospects often are complex and involve infinitely many values, as in normal and lognormal distributions. This paper provides a preference foundation of prospect theory for such complex prospects. We allow for unbounded utility and only require finite additivity of the underlying probability distributions, leaving the restriction to countably additive distributions optional. As corollaries, we generalize previously obtained preference foundations for special cases of prospect theory (rank-dependent utility and Choquet expected utility) that all required countable additivity. We now obtain genuine generalizations of de Finetti’s and Savage’s finitely additive setups to unbounded utility.
Subfields: General Decision Sciences, Management Science and Operations Research
View Paper: https://www.semanticscholar.org/paper/0ac97da3e8c8713ef27795e9e84b1eefb52fe09c
Citations in the corpus
- Do extreme returns matter in emerging markets? Evidence from the Chinese stock market (2017, unknown): “…models of decision making under uncertainty -- Tversky and Kahneman’s (1992) cumulative prospect theory (CPT), as recently extended by Barberis and Huang (2008) and Kothiyal et al. (2011) and the optimal expectations framework of Brunnermeier and Parker (2005) and Brunnermeier et al. (2007).”
- Asset pricing and ambiguity: Empirical evidence (2018, unknown): “In general, irrespective of the decision-theoretic framework, f2 encompasses not only 6The function V puts more structure on the functional representation proposed by Wakker (2010) and Kothiyal et al. (2011) for Tversky and Kahneman’s (1992) cumulative prospect theory.”
- Expected Utility with Uncertain Probabilities Theory (2017, unknown): “However, alternative sets of CPT axioms can be adopted; e.g., Tversky and Kahneman (1992), Wakker and Tversky (1993), Chew and Wakker (1996), and Kothiyal et al. (2011).”