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A genuine foundation for prospect theory

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  • Ulrich Schmidt
  • Horst Zank

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Abstract

In most models of (cumulative) prospect theory, reference dependence of preferences is imposed beforehand and the location of the reference point is determined exogenously. This paper presents principles that provide critical tests and foundations for prospect theory preferences without assuming reference-dependent preferences a priori. Instead, reference dependence is derived from behavior and the reference point arises endogenously. Copyright Springer Science+Business Media New York 2012

Suggested Citation

  • Ulrich Schmidt & Horst Zank, 2012. "A genuine foundation for prospect theory," Journal of Risk and Uncertainty, Springer, vol. 45(2), pages 97-113, October.
  • Handle: RePEc:kap:jrisku:v:45:y:2012:i:2:p:97-113
    DOI: 10.1007/s11166-012-9150-8
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    More about this item

    Keywords

    Diminishing sensitivity; Prospect theory; Reference dependence; Reference point; Utility; D81;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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