Stochastic Dominance and Cumulative Prospect Theory
We generalize and extend the second order stochastic dominance condition available for Expected Utility to Cumulative Prospect Theory. The new definitions include, among others, preferences represented by S-shaped value and inverse S-shaped probability weighting functions. The stochastic dominance conditions supply a framework to test different features of Cumulative Prospect Theory. In the experimental part of the working paper we offer a test of several joint hypotheses on the value function and the probability weighting function. Assuming empirically relevant weighting functions, we can reject the inverse S-shaped value function recently advocated by Levy and Levy (2002a), in favor of the S-shaped form. In addition, we find generally supporting evidence for loss aversion. Violations of loss aversion can be linked to subjects using the overall probability of winning as heuristic.
|Date of creation:||Jan 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +34 94 487 52 52
Fax: +34 94 424 46 21
Web page: http://www.fbbva.es
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:fbb:wpaper:201061. 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: (Fundacion BBVA / BBVA Foundation)
If references are entirely missing, you can add them using this form.