Cumulative Prospect Theory Portfolio Selection
In: University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 26/WP/2020
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In: University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 26/WP/2020
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Working paper
In: Journal of risk and uncertainty, Band 7, Heft 2, S. 147-175
ISSN: 1573-0476
In: Risk Assessment for Water Infrastructure Safety and Security, S. 219-304
In: Mathematical social sciences, Band 40, Heft 3, S. 237-263
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In: Swiss Finance Institute Research Paper No. 07-21
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In: Mathematical social sciences, Band 96, S. 85-91
In: University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 35/WP/2016
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In: Applied Economics, Band 41, Heft 6, S. 685-689
Skewness of return has been suggested as a reason why agents might choose to gamble, ceteris paribus, in Cumulative Prospect Theory (CPT). We investigate the relationship between moments of return in two models where agents choices over uncertain outcomes are determined as in CPT. We illustrate via examples that in CPT theory, as with expected utility theory, propositions that agents have a preference for skewness may be invalid.
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In: Decision analysis: a journal of the Institute for Operations Research and the Management Sciences, INFORMS, Band 13, Heft 3, S. 192-208
ISSN: 1545-8504
Relying on the experimental findings that actual choice behavior often violates the axioms of expected utility theory (EUT), we study non-EUT preferences in a noncooperative game-theoretic framework. In particular, agents' preferences are represented by the pair of functions suggested in cumulative prospect theory (CPT). Accordingly, three key aspects of CPT are incorporated: subjective probability weighting, loss aversion, and reference dependence. We introduce a correlated equilibrium and two mixed strategy equilibria for agents with CPT preferences. We prove the existence of equilibria for finite normal form games and investigate the sets of equilibria in some examples.
In: Applied Economics, Band 40, Heft 1, S. 5-15
Standard parametric specifications of Cumulative Prospect theory (CPT) can explain why agents bet on longshots at actuarially unfair odds. However the standard specification of CPT cannot explain why people might bet on more favored outcomes, where by construction the greatest volume of money is bet. This paper outlines a parametric specification than can consistently explain gambling over all outcomes. In particular we assume that the value function is bounded from above and below and that the degree of loss aversion experienced by the agent is smaller for small-stake gambles (as a proportion of wealth) than usually assumed in CPT. There are a number of new implications of this specification. Boundedness of the value function in CPT implies that the indifference curve between expected-return and win-probability for a given stake will typically exhibit both an asymptote (implying rejection of an infinite gain bet) and a minimum, as the shape of the value function dominates the probability weighting function. Also the high probability section of the indifference curve will exhibit a maximum.
In: Human-Centric Decision-Making Models for Social Sciences; Studies in Computational Intelligence, S. 115-130
In: Theory and Decision Library; Advances in Decision Making Under Risk and Uncertainty, S. 91-107
In: Journal of Mathematical Economics, Forthcoming
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