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An Axiomatization of Cumulative Prospect Theory

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Author Info
Wakker, Peter
Tversky, Amos

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Abstract

This paper presents a method for axiomatizing a variety of models for decision making under uncertainty, including Expected Utility and Cumulative Prospect Theory. This method identifies, for each model, the situations that permit consistent inferences about the ordering of value differences. Examples of rank-dependent and sign-dependent preference patterns are used to motivate the models and the "tradeoff consistency" axioms that characterize them. The major properties of the value function in Cumulative Prospect Theory--diminishing sensitivity and loss aversion--are contrasted with the principle of diminishing marginal utility that is commonly assumed in Expected Utility. Copyright 1993 by Kluwer Academic Publishers

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

Volume (Year): 7 (1993)
Issue (Month): 2 (October)
Pages: 147-75
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Handle: RePEc:kap:jrisku:v:7:y:1993:i:2:p:147-75

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  8. Ludwig, Alexander & Zimper, Alexander, 2004. "Rational Expectations and Ambiguity: A Comment on Abel (2002)," Sonderforschungsbereich 504 Publications 04-66, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
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