This paper pits expected utility theory and cumulative prospect theory against each other as regards their descriptive accuracy. Some older as well as newer pieces of evidence are described which show that under certain circumstances, expected utility theory is not descriptively valid. The most promising alternative, cumulative prospect theory, is then presented in some detail, including a brief discussion of how it avoids violations of stochastic dominance and how it explains the above evidence. It is pointed out that there are other empirical observations which cannot be explained by cumulative prospect theory either. It is concluded that expected utility theory is likeyl to remain the core instrument for modeling human decision-making under risk at least in the near future.
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Article provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its journal AUCO Czech Economic Review.