scholarly journals Cumulative Prospect Theory Version with Fuzzy Values of Outcome Estimates

Risks ◽  
2021 ◽  
Vol 9 (4) ◽  
pp. 72
Author(s):  
Oleg Uzhga-Rebrov ◽  
Peter Grabusts
Keyword(s):  
Prospect Theory ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Cumulative Prospect Theory ◽  
Development History ◽  
Decisions Under Risk ◽  
History Of ◽  
Main Factors ◽  
Theoretical Foundations

Choosing solutions under risk and uncertainty requires the consideration of several factors. One of the main factors in choosing a solution is modeling the decision maker’s attitude to risk. The expected utility theory was the first approach that allowed to correctly model various nuances of the attitude to risk. Further research in this area has led to the emergence of even more effective approaches to solving this problem. Currently, the most developed theory of choice with respect to decisions under risk conditions is the cumulative prospect theory. This paper presents the development history of various extensions of the original expected utility theory, and the analysis of the main properties of the cumulative prospect theory. The main result of this work is a fuzzy version of the prospect theory, which allows handling fuzzy values of the decisions (prospects). The paper presents the theoretical foundations of the proposed version, an illustrative practical example, and conclusions based on the results obtained.

scholarly journals From expected utility theory to prospect theory: tracking down the experimental path after forty years

2020 ◽  
Vol 30 (4) ◽  
Author(s):  
Sławomir Kalinowski
Keyword(s):  
Experimental Study ◽  
Prospect Theory ◽  
Expected Utility ◽  
Research Program ◽  
Utility Theory ◽  
Scientific Research ◽  
Expected Utility Theory ◽  
Cumulative Prospect Theory ◽  
The Other ◽  
Scientific Research Program

The article is an experimental study testing the expected utility theory axioms. Three of the experiments are a repetition of a previous test, while the other two are original. The repeated experiments were performed in slightly changed circumstances. The participants were incentivised with rewards, which did not happen in the tree replicated tests. The results confirmed degeneration of the expected utility theory as a scientific research program. The evidence that emerged from the tests supported the hypothesis on the cumulative prospect theory predicting facts not forecasted by the EUT.

scholarly journals An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and Expected Utility Theory

2019 ◽  
Vol 11 (3) ◽  
pp. 34-67 ◽  
Author(s):  
Hui-Kuan Chung ◽  
Paul Glimcher ◽  
Agnieszka Tymula
Keyword(s):  
Prospect Theory ◽  
Empirical Evidence ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Experimental Comparison ◽  
Reference Dependence ◽  
Empirical Results ◽  
Incentive Compatible ◽  
Gain Loss

Prospect theory, used descriptively for decisions under both risk and certainty, presumes concave utility over gains and convex utility over losses; a pattern widely seen in lottery tasks. Although such discontinuous gain-loss reference-dependence is also used to model riskless choices, only limited empirical evidence supports this use. In incentive-compatible experiments, we find that gain-loss reflection effects are not observed under riskless choice as predicted by prospect theory, even while in the same subjects gain-loss reflection effects are observed under risk. Our empirical results challenge the application of choice models across both risky and riskless domains. (JEL C91, D12, D81)

Inconsistent Bond Pricing in a Rational Market

2016 ◽  
Vol 19 (03) ◽  
pp. 1650017 ◽  
Author(s):  
Hong-Yi Chen ◽  
Hsiao-Yin Chen
Keyword(s):  
Expected Utility ◽  
Utility Theory ◽  
Value Function ◽  
Weighting Function ◽  
Expected Utility Theory ◽  
Cumulative Prospect Theory ◽  
Bond Pricing ◽  
Bond Rating ◽  
Rational Models ◽  
The Value Function

This study proposes two rational models to reconcile the enigma regarding the inconsistent bond pricing that results among bonds with the same ratings. First, we apply a nonlinear utility function to the expected utility theory and observe different expected utilities for senior bonds and subordinated bonds with the same bond rating. Second, we implement the cumulative prospect theory to demonstrate that the inconsistency occurs when the effect on the convexity of the value function dominates the effect on the overweightness of the weighting function. The two models demonstrate that rather than using the notching policy to explain bond pricing, the inconsistent bond pricing can exist under rational market conditions.

Contrasting Rational and Psychological Analyses of Political Choice

1988 ◽  
Vol 82 (3) ◽  
pp. 719-736 ◽  
Author(s):  
George A. Quattrone ◽  
Amos Tversky
Keyword(s):  
Risk Aversion ◽  
Prospect Theory ◽  
Expected Utility ◽  
Reference Point ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Risky Choice ◽  
Political Candidates ◽  
Risk Seeking ◽  
Psychological Analysis

We contrast the rational theory of choice in the form of expected utility theory with descriptive psychological analysis in the form of prospect theory, using problems involving the choice between political candidates and public referendum issues. The results showed that the assumptions underlying the classical theory of risky choice are systematically violated in the manner predicted by prospect theory. In particular, our respondents exhibited risk aversion in the domain of gains, risk seeking in the domain of losses, and a greater sensitivity to losses than to gains. This is consistent with the advantage of the incumbent under normal conditions and the potential advantage of the challenger in bad times. The results further show how a shift in the reference point could lead to reversals of preferences in the evaluation of political and economic options, contrary to the assumption of invariance. Finally, we contrast the normative and descriptive analyses of uncertainty in choice and address the rationality of voting.

scholarly journals ECONOMICS OF RANDOMNESS: BEHAVIORAL ASPECTS OF DECISION MAKING UNDER RISK

2017 ◽  
Vol 9 (2) ◽  
pp. 7-14
Author(s):  
Alexander Krasilnikov
Keyword(s):  
Decision Making ◽  
Risk Analysis ◽  
Uncertainty Analysis ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Probabilistic Methods ◽  
Risk And Uncertainty ◽  
Decision Making Under Risk ◽  
History Of

The paper discusses evolution of the concept of risk in economics. History of probabilistic methods and approaches to risk and uncertainty analysis is considered. Expected utility theory, behavioral approaches, heuristic models and methods of neuroeconomics are analyzed. Author investigates stability of neoclassical program related to risk analysis and suggests further directions of development.

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