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A Further Examination of Cumulative Prospect Theory Parameterizations

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  • Neilson, William S
  • Stowe, Jill

Abstract

Recent experimental studies have focused on fitting parameterized functional forms to cumulative prospect theory's weighting function. This paper examines the behavioral implications of the functional forms and the estimated parameters. We find that none of the parameterizations can simultaneously account for gambling on unlikely gains and the Allais paradox behavior or other strong choice patterns from experiments. Parameter estimates that lead to reasonable amounts of insurance and gambling behavior tend to also generate large risk premia. Taken as a whole, the analysis suggests that the functional forms proposed in the literature are not suitable for generalization to applied settings. Copyright 2002 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 24 (2002)
Issue (Month): 1 (January)
Pages: 31-46

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Handle: RePEc:kap:jrisku:v:24:y:2002:i:1:p:31-46

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Web page: http://www.springerlink.com/link.asp?id=100299

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  1. Matthew Rabin, 2001. "Risk Aversion and Expected Utility Theory: A Calibration Theorem," Levine's Working Paper Archive 7667, David K. Levine.
  2. Colin Camerer, 1998. "Bounded Rationality in Individual Decision Making," Experimental Economics, Springer, vol. 1(2), pages 163-183, September.
  3. George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
  4. 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.
  5. Battalio, Raymond C & Kagel, John H & Jiranyakul, Komain, 1990. " Testing between Alternative Models of Choice under Uncertainty: Some Initial Results," Journal of Risk and Uncertainty, Springer, vol. 3(1), pages 25-50, March.
  6. 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.
  7. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  8. Fox, Craig R & Rogers, Brett A & Tversky, Amos, 1996. "Options Traders Exhibit Subadditive Decision Weights," Journal of Risk and Uncertainty, Springer, vol. 13(1), pages 5-17, July.
  9. Bernasconi, Michele, 1998. "Tax evasion and orders of risk aversion," Journal of Public Economics, Elsevier, vol. 67(1), pages 123-134, January.
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