The standard theory of optimal income taxation under uncertainty has been developed under the assumption that individuals maximize expected utility. However, prospect theory has now been established as an alternative model of individual behaviour, with empirical support. This paper explores the theory of optimal income taxation under uncertainty when individuals behave according to the tenets o...

The correct control of security often depends on decisions under uncertainty. Using quantified information about risk, one may hope to achieve more precise control by making better decisions. We discuss and examine how Prospect Theory, the major descriptive theory of risky decisions, predicts such decisions will go wrong and if such problems may be corrected. 1 Can security decisions go wrong? ...

This paper gives a survey over a common aspect of prospect theory that occurred to be of importance in a series of recent papers developed by Enrico De Giorgi, Thorsten Hens, Janos Mayer, Haim Levy, Thierry Post, Marc Oliver Rieger and Mei Wang. The common aspect of these papers is that the value function of the prospect theory of Kahneman and Tversky (1979) and similarly that of Tversky and Ka...

Many experimental studies have demonstrated that human decision-makers exhibit the pull-to-center effect in newsvendor decision. It has been shown in the literature that prospect theory with a decision-dependent reference point can predict the pull-to-center effect for the newsvendor problem by assuming a uniform distribution of demand. In this paper, we prove this result for a general case: pr...

This paper presents a method for axiomatizing a variety of models for decision making under uncertainty, including Expected Utility and Cumulative Prospect Theory. This method identifies, for each model, the situations that permit consistent inferences about the ordering of value differences. Examples of rankdependent and sign-dependent preference patterns are used to motivate the models and th...