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The expo-power value function as a candidate for the work-horse specification in parametric versions of cumulative prospect theory

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  • Peel, D.A.
  • Zhang, Jie

Abstract

The piecewise power value function proposed by Kahneman and Tversky is inconsistent with both theoretical and experimental work. We propose the expo-power function as an alternative to the power function and examine its ability to explain choices in Allais experiments.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 105 (2009)
Issue (Month): 3 (December)
Pages: 326-329

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Handle: RePEc:eee:ecolet:v:105:y:2009:i:3:p:326-329

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Web page: http://www.elsevier.com/locate/ecolet

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Keywords: Cumulative prospect theory Expo-power value function Exponential value function;

References

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  1. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  2. Hans Binswanger, 1980. "Attitudes toward risk: Experimental measurement in rural india," Artefactual Field Experiments 00009, The Field Experiments Website.
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  5. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
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  7. U Schmidt & H Zank, 2002. "What is Loss Aversion?," The School of Economics Discussion Paper Series 0209, Economics, The University of Manchester.
  8. Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 167-96, March.
  9. George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
  10. De Giorgi, Enrico & Hens, Thorsten, 2005. "Making Prospect Theory Fit for Finance," Discussion Papers 2005/19, Department of Business and Management Science, Norwegian School of Economics.
  11. Mohammed Abdellaoui & Han Bleichrodt & Corina Paraschiv, 2007. "Loss Aversion Under Prospect Theory: A Parameter-Free Measurement," Management Science, INFORMS, vol. 53(10), pages 1659-1674, October.
  12. John List & Michael Haigh, 2005. "A simple test of expected utility theory using professional traders," Artefactual Field Experiments 00093, The Field Experiments Website.
  13. Michael Cain & David Law & David Peel, 2008. "Bounded cumulative prospect theory: some implications for gambling outcomes," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 5-15.
  14. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  15. Neilson, William S & Stowe, Jill, 2002. " A Further Examination of Cumulative Prospect Theory Parameterizations," Journal of Risk and Uncertainty, Springer, vol. 24(1), pages 31-46, January.
  16. Conlisk, John, 1989. "Three Variants on the Allais Example," American Economic Review, American Economic Association, vol. 79(3), pages 392-407, June.
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