On the predictions of cumulative prospect theory for third and fourth order risk preferences

Abstract In this paper, we analyse higher-order risky choices by the representative cumulative prospect theory (CPT) decision maker from three alternative reference points. These are status quo, average payout and maxmin. The choice tasks consider in our analysis include binary risks, ones employed experimental literature on higher order risk preferences. We demonstrate that made subject depend point. If point is quo lottery exhibit symmetric risk, there no third reflection effect of but a fourth effect. When point, any or possible dependent upon payoffs. However, under assumption maxmin prudent temperate. addition to these results, reveals CPT can choose combinations second with options differ those other major models risk. contrast theoretical predictions empirical results reported preferences able reconcile some conflicting evidence.