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Cumulative prospect theory's functional menagerie

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  • Henry Stott

Abstract

Many different functional forms have been suggested for both the value function and probability weighting function of Cumulative Prospect Theory (Tversky and Kahneman, 1992). There are also many stochastic choice functions available. Since these three components only make predictions when considered in combination, this paper examines the complete pattern of 256 model variants that can be constructed from twenty functions. All these variants are fit to experimental data and their explanatory power assessed. Significant interaction effects are observed. The best model has a power value function, a risky weighting function due to Prelec (1998), and a Logit function. Copyright Springer Science + Business Media, LLC 2006

Suggested Citation

  • Henry Stott, 2006. "Cumulative prospect theory's functional menagerie," Journal of Risk and Uncertainty, Springer, vol. 32(2), pages 101-130, March.
  • Handle: RePEc:kap:jrisku:v:32:y:2006:i:2:p:101-130
    DOI: 10.1007/s11166-006-8289-6
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