Composition Rules in Old and New Prospect Theory†

Original and cumulative prospect theory differ in the composition rule used to combine the probability weighting function and the value function. We test these composition rules by performing a novel test. We apply estimates of prospect theory’s weighting and value function obtained from two-outcome cash equivalents, a domain where original and cumulative prospect theory coincide, to three-outcome cash equivalents, a domain where the composition rules of the two theories differ. We find systematic under-prediction for cumulative prospect theory and systematic over-prediction for original prospect theory. We use these findings to motivate new areas for theoretical and empirical investigation. Running Header: Composition Rules in Prospect Theory