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Prospect Theory for Continuous Distributions Games and Prospects

Author

Listed:
  • Marc Oliver Rieger

    (ETH Zurich, Department of Mathematics)

  • Mei Wang

    (University of Zurich, ISB)

Abstract

We extend the original form of Prospect Theory by Kahneman and Tversky from finite lotteries to arbitrary probability distributions, thus paving the way for applications in economics and finance. Moreover, we suggest a method how to incorporate a crucial step of the “editing phase” into Prospect Theory and to remove in this way the discontinuity of the original model.

Suggested Citation

  • Marc Oliver Rieger & Mei Wang, 2007. "Prospect Theory for Continuous Distributions Games and Prospects," Swiss Finance Institute Research Paper Series 07-30, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp0730
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    File URL: http://ssrn.com/abstract=1020042
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    More about this item

    Keywords

    Prospect Theory; Cumulative Prospect Theory; continuity; probability weighting; first-order stochastic dominance.;

    JEL classification:

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

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