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A simple model of cumulative prospect theory

  • Schmidt, Ulrich
  • Zank, Horst

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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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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