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On Mental Transformations

  • Kontek, Krzysztof

The paper presents an alternative interpretation of the experimental data published by Kahneman and Tversky in their 1992 study "Advances in Prospect Theory”, which describes the Cumulative version of their Prospect Theory from 1979. It was assumed that, apart from the operations made during the initial stage of problem resolution, which Prospect Theory defines as Editing (here generalized as Mental Adaptation), other mental transformations such as Prospect Scaling (resulting from Focused Attention) and Logarithmic Perception of Financial Stimuli should be considered when analyzing the experimental data. This led to the design of an explicit, simple and symmetric solution without the use of the probability weighting function. The double S-type function obtained (the aspiration function) resembles the utility curve specified by the Markowitz hypothesis (1952) and substitutes the fourfold pattern of risk attitudes introduced by Cumulative Prospect Theory. The results presented constitute a basis for negating Prospect Theory as a theory which correctly describes how decisions are made under conditions of risk and may signal a return to a description of people’s behavior that only relies on the utility-like function.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16516.

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Date of creation: 25 Mar 2009
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Handle: RePEc:pra:mprapa:16516
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  1. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  2. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
  3. Wakker, Peter, 1989. "Continuous subjective expected utility with non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 18(1), pages 1-27, February.
  4. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
  5. Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 167-96, March.
  6. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  7. Wakker, Peter, 1990. "Characterizing optimism and pessimism directly through comonotonicity," Journal of Economic Theory, Elsevier, vol. 52(2), pages 453-463, December.
  8. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
  9. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  10. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  11. George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
  12. Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-90, July.
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