IDEAS home Printed from https://ideas.repec.org/a/eee/mateco/v50y2014icp1-11.html
   My bibliography  Save this article

Evolutionary stability of prospect theory preferences

Author

Listed:
  • Rieger, Marc Oliver

Abstract

We demonstrate that in simple 2×2 games (cumulative) prospect theory preferences can be (semi-)evolutionarily stable, in particular, a population of players with prospect theory preferences is stable against more rational players, i.e. players with a smaller degree of probability weighting. We also show that in a typical game with infinitely many strategies, the “war of attrition”, probability weighting is (semi-)evolutionarily stable. Finally, we generalize to other notions of stability. Our results may help to explain why probability weighting is generally observed in humans, although it is not optimal in usual decision problems.

Suggested Citation

  • Rieger, Marc Oliver, 2014. "Evolutionary stability of prospect theory preferences," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 1-11.
  • Handle: RePEc:eee:mateco:v:50:y:2014:i:c:p:1-11
    DOI: 10.1016/j.jmateco.2013.11.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304406813001055
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. William H. Sandholm, 2001. "Preference Evolution, Two-Speed Dynamics, and Rapid Social Change," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 637-679, July.
    2. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    3. 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.
    4. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2003. "Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, Elsevier, vol. 45(1), pages 97-113, October.
    5. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    6. Lo, Kin Chung, 1999. "Extensive Form Games with Uncertainty Averse Players," Games and Economic Behavior, Elsevier, vol. 28(2), pages 256-270, August.
    7. Ely, Jeffrey C. & Yilankaya, Okan, 2001. "Nash Equilibrium and the Evolution of Preferences," Journal of Economic Theory, Elsevier, vol. 97(2), pages 255-272, April.
    8. Kenneth J. Arrow, 1950. "A Difficulty in the Concept of Social Welfare," Journal of Political Economy, University of Chicago Press, vol. 58, pages 328-328.
    9. Oechssler, Jorg & Riedel, Frank, 2002. "On the Dynamic Foundation of Evolutionary Stability in Continuous Models," Journal of Economic Theory, Elsevier, vol. 107(2), pages 223-252, December.
    10. Fershtman, Chaim & Safra, Zvi & Vincent, Daniel, 1991. "Delayed agreements and nonexpected utility," Games and Economic Behavior, Elsevier, vol. 3(4), pages 423-437, November.
    11. Ok, Efe A. & Vega-Redondo, Fernando, 2001. "On the Evolution of Individualistic Preferences: An Incomplete Information Scenario," Journal of Economic Theory, Elsevier, vol. 97(2), pages 231-254, April.
    12. Florian Herold & Nick Netzer, 2010. "Probability Weighting as Evolutionary Second-best," SOI - Working Papers 1005, Socioeconomic Institute - University of Zurich, revised Jan 2011.
    13. Ho-Chyuan Chen & William Neilson, 1999. "Pure-strategy Equilibria with Non-expected Utility Players," Theory and Decision, Springer, vol. 46(2), pages 201-212, April.
    14. Marc Rieger & Mei Wang, 2008. "Prospect theory for continuous distributions," Journal of Risk and Uncertainty, Springer, vol. 36(1), pages 83-102, February.
    15. Dekel, Eddie & Safra, Zvi & Segal, Uzi, 1991. "Existence and dynamic consistency of Nash equilibrium with non-expected utility preferences," Journal of Economic Theory, Elsevier, vol. 55(2), pages 229-246, December.
    16. Jonathan Ingersoll, 2008. "Non-Monotonicity of the Tversky-Kahneman Probability-Weighting Function: A Cautionary Note," European Financial Management, European Financial Management Association, vol. 14(3), pages 385-390.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:kap:theord:v:82:y:2017:i:4:d:10.1007_s11238-016-9582-8 is not listed on IDEAS

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:50:y:2014:i:c:p:1-11. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jmateco .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.