Work

An Alternative to Prospect Theory

Year: 2006

Type: article

Abstract: This paper presents a new approach to decision-making under risk. Preference over risky prospects is defined as a triadic reference-dependent relation in a sense similar to Sugden (2003). Characterized by a set of von Neumann-Morgenstern-style axioms, a new reference-dependent representation theory ¨C called compound utility theory (CUT) ¨C is obtained which accommodates nonlinear preferences (in probabilities) without invoking the probability-transformation assumption of cumulative prospect theory. Given any opportunity set, a unique reference level can be identified which is consistent with CUT and which enables one to study preferences over both relative changes and absolute levels of wealth simultaneously.

Source: RePEc: Research Papers in Economics

Author: Liang Zou

Institution: University of Amsterdam

Language: English

Topic: Decision-Making and Behavioral Economics

Subfield: General Decision Sciences

Field: Decision Sciences

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2111248617

FWCI:

Cites: 63

Cited by: 2

Related to: 10