Whilst Cumulative Prospect theory (CPT) provides an explanation of gambling on longshots at actuarially unfair odds, it cannot explain why people might bet on more favoured outcomes. This paper shows that this is explicable if the degree of loss aversion experienced by the agent is reduced for small-stake gambles (as a proportion of wealth), and probability distortions are greater over losses t...

People are sometimes risk-averse in gains but risk-loving in losses. Such behavior and other anomalies underlying prospect theory arise from a model of local status maximization in which consumers compare their wealth with other consumers of similar wealth. This social explanation shares key features with the psychological explanation offered by Kahneman and Tversky. JEL Classification: D81, D11

We study equilibrium trading strategies and market quality in an economy in which speculators display preferences consistent with Prospect Theory (Kahneman and Tversky, [39]; Tversky and Kahneman, [63]), i.e., loss aversion and mild risk seeking in losses. Loss aversion (risk seeking in losses) induces speculators to trade less (more), and less cautiously (more aggressively), with their private...

Prospect theory is currently the main descriptive theory of decision under uncertainty. It generalizes expected utility by introducing nonlinear decision weighting and loss aversion. A difficulty in the study of multiattribute utility under prospect theory is to determine when an attribute yields a gain or a loss. One possibility, which has been adopted in the existing theoretical literature on...

A behavioral representative investor who evaluates a single risky asset based on cumulative prospect theory will often induce high kurtosis, negative skewness, and persistent autocorrelation into the distribution of market returns even if the asset payoffs are merely a sequence of independent coin tosses. These findings continue to hold even when the investor is simply loss averse.

This paper reviews development of Prospect Theory on its four key issues: the editing process, the value function, the probability weighting function, and risk attitude assessment under Prospect Theory. Based on past findings, the author suggests some revisions to Prospect Theory, which allows the assimilation of small gains and losses in the value function and frames gains and losses as percen...

Gains and Losses in the Eyes of the Beholder: A Comparative Study of Foreign Policy Decision Making Under Risk. (December 2004) Yi Yang, B.A., Foreign Affairs College Chair of Advisory Committee: Dr. Alex Mintz Prospect theory is a descriptive model of individual decision-making under risk (Kahneman and Tversky 1979). The central tenet of prospect theory posits that the risk orientation of deci...

Purpose – To: evaluate Prospect Theory and Cumulative Prospect Theory as functional models of decision making and risk within various contexts; compare and analyze risk models and decision-making models; evaluate models of stock risk developed by Robert Engle and related models; establish whether the models are related and have the same foundations; relate risk, decision making and options theo...

This paper examines the problem of choosing the optimal portfolio for an investor with asymmetric attitude to gains and losses described in the prospect theory of A. Tversky and D. Kahneman. We consider the portfolio optimization problem for an investor who follows the assumptions of the prospect theory and the cumulative prospect theory under conditions on the stochastic behavior both of the p...