Third-generation prospect theory
نویسندگان
چکیده
We present a new theory of decision under uncertainty: third-generation prospect theory (PT). This retains the predictive power of previous versions of prospect theory, but extends that theory by allowing reference points to be uncertain while decision weights are specified in a rank-dependent way. We show that PT preferences respect a state-conditional form of stochastic dominance. The theory predicts the observed tendency for willingness-to-accept valuations of lotteries to be greater than willingness-to-pay valuations. When PT is made operational by using simple functional forms with parameter values derived from existing experimental evidence, it predicts observed patterns of the preference reversal phenomenon.
منابع مشابه
Empirical evaluation of third-generation prospect theory
Third generation prospect theory (Schmidt et al. J Risk Uncertain 36:203– 223, 2008) is a theory of choices and of judgments of highest buying and lowest selling prices of risky prospects, i.e., of willingness to pay (WTP) and willingness to accept (WTA). The gap betweenWTP andWTA is sometimes called the “endowment effect” and was previously called the “point of view” effect. Third generation p...
متن کاملAn extended hesitant group decision-making technique based on the prospect theory for emergency situations
Throughout the present manuscript, we are going to introduce a novel group emergency decision-making technique in which the application of prospect theory explains the psychological behaviour of the decision maker who is affected by the hesitancy and uncertainty of cognition in decision making problems.\Instead of usual aggregation procedure, we implement here a new fusion technique that ...
متن کاملProspect and Markowitz Stochastic Dominance
Levy and Levy (2002, 2004) develop the Prospect and Markowitz stochastic dominance theory with S-shaped and reverse S-shaped utility functions for investors. In this paper, we extend Levy and Levy’s Prospect Stochastic Dominance theory (PSD) and Markowitz Stochastic Dominance theory (MSD) to the first three orders and link the corresponding S-shaped and reverse S-shaped utility functions to the...
متن کاملExplaining Heterogeneity in Risk Preferences Using a Finite Mixture Model
This paper studies the effect of the space (distance) between lotteries' outcomes on risk-taking behavior and the shape of estimated utility and probability weighting functions. Previously investigated experimental data shows a significant space effect in the gain domain. As compared to low spaced lotteries, high spaced lotteries are associated with higher risk aversion for high probabilities o...
متن کاملA Prospect Theory of Power Transition: Why Power Transition Does Not Imply War?
We present a prospect theory model to explain why power transitions do not necessarily lead to war. We find that three major mechanisms prevent the occurrence of potential power transition wars. First, the dual boiling frog effects occurring in the middle range of capability catching-up rate prevent a dominant state from preempting and a rising state from challenging the other side. Second, div...
متن کامل