This paper presents a new approach to decision-making under risk. Preference over risky prospects is defined as a triadic reference-dependent relation in a sense similar to Sugden (2003). Characterized by a set of von Neumann-Morgenstern-style axioms, a new reference-dependent representation theory – called compound utility theory (CUT) – is obtained which accommodates nonlinear preferences (in...

This note presents explicitly a strong connection between the Tsallis thermodynamics and the so-called prospect theory introduced to take into account agent’s decisions under risk. Moreover, using the cumulative prospect theory adapted here for a continuous framework, we show that if the Tsallis parameter q belongs to the interval [0,1], then the prospect theory requirement that extreme events ...

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Whether we like it or not we face risk every day of our lives. From selecting a route home from work to selecting a mate, we rarely know in advance and with certainty what the outcome of our decisions will be. Thus, we are forced to make tradeoffs between the attractiveness (or unattractiveness) of potential outcomes and their likelihood of occurrence. The lay conception of risk is associated w...

We study asset prices in an economy where investors derive direct utility not only from consumption but also from uctuations in the value of their Žnancial wealth. They are loss averse over these uctuations, and the degree of loss aversion depends on their prior investment performance. We Žnd that our framework can help explain the high mean, excess volatility, and predictability of stock ret...