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Absolute vs. Relative Notion of Wealth Changes

  • Kontek, Krzysztof

This paper discusses solutions derived from lottery experiments using two alternative assumptions: that people perceive wealth changes as absolute amounts of money; and that people consider wealth changes as a proportion of some reference value dependant on the context of the problem under consideration. The former assumption leads to the design of Prospect Theory, the latter - to a solution closely resembling the utility function hypothesized by Markowitz (1952). This paper presents several crucial arguments for the latter approach and provides strong arguments for rejecting the Prospect Theory paradigm.

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File URL: http://mpra.ub.uni-muenchen.de/17336/1/MPRA_paper_17336.pdf
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File URL: http://mpra.ub.uni-muenchen.de/29764/2/MPRA_paper_29764.pdf
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File URL: http://mpra.ub.uni-muenchen.de/33134/2/MPRA_paper_33134.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17336.

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Date of creation: 16 Sep 2009
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Handle: RePEc:pra:mprapa:17336
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  1. Kontek, Krzysztof, 2009. "On Mental Transformations," MPRA Paper 16516, University Library of Munich, Germany.
  2. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  3. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
  4. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  5. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  6. Krzysztof Kontek, 2009. "Lottery valuation using the aspiration / relative utility function," Working Papers 39, Department of Applied Econometrics, Warsaw School of Economics.
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