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A Genuine Foundation for Prospect Theory

  • Ulrich Schmidt
  • Horst Zank

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

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Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 1114.

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Date of creation: 2011
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Handle: RePEc:man:sespap:1114
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