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A simple model of cumulative prospect theory

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  • Schmidt, Ulrich
  • Zank, Horst

Abstract

The present paper combines loss attitudes and linear utility by providing an axiomatic analysis of cumulative prospect theory (CPT) in the framework for decision under uncertainty. We derive a two-sided variant of Choquet expected utility (CEU) with possibly different capacities for gains and for losses, and linear utility. Naturally, utility may have a kink at the status quo, which allows for the exhibition of loss aversion. The central condition of our model is termed independence of common increments.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 45 (2009)
Issue (Month): 3-4 (March)
Pages: 308-319

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Handle: RePEc:eee:mateco:v:45:y:2009:i:3-4:p:308-319

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

Related research

Keywords: Comonotonic sure-thing principle Cumulative prospect theory Linear utility Loss aversion;

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Citations

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Cited by:
  1. Ulrich Schmidt & Horst Zank, 2007. "Linear cumulative prospect theory with applications to portfolio selection and insurance demand," Decisions in Economics and Finance, Springer, vol. 30(1), pages 1-18, 05.
  2. James C. Cox & Vjollca Sadiraj & Ulrich Schmidt, 2011. "Paradoxes and Mechanisms for Choice under Risk," Kiel Working Papers 1712, Kiel Institute for the World Economy.
  3. Ulrich Schmidt & Horst Zank, 2012. "A genuine foundation for prospect theory," Journal of Risk and Uncertainty, Springer, vol. 45(2), pages 97-113, October.
  4. Wan, Shu-Ping & Li, Deng-Feng, 2013. "Fuzzy LINMAP approach to heterogeneous MADM considering comparisons of alternatives with hesitation degrees," Omega, Elsevier, vol. 41(6), pages 925-940.

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