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2017 | OriginalPaper | Buchkapitel

4. Prospect Theory

verfasst von : Masao Ogaki, Saori C. Tanaka

Erschienen in: Behavioral Economics

Verlag: Springer Singapore

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Abstract

This chapter explains prospect theory, which modifies expected utility theory in important ways. Prospect theory can be consistent with economic behaviors that cannot be explained by the expected utility theory such as those in the Allais Paradox.

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Vorheriges Kapitel Economic Behavior Under Uncertainty

Nächstes Kapitel Bounded Rationality

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For an explanation of advancements in prospect theory proposed by Tversky and Kahneman (1992) such as introduction of a rank-dependent way of calculating weights and more recent empirical work, see Takemura (2014).

Tversky and Kahneman (1992) developed an extension of prospect theory and used this theory in their estimation. This extension is called cumulative prospect theory as explained in Sect. 4.7.

In this chapter, we are converting the example in the last chapter by the exchange rate of 100 French francs per 1 dollar. This exchange rate is chosen for exposition purposes rather than for realism.

Camerer (2000) also explains estimation results for cumulative prospect theory.

This prediction is clearer in dynamic models of labor supply for transitory wage changes as mentioned in Camerer et al. (1997) than static models of labor supply in which income effects complicate theoretical predictions.

They estimated the probability weighting function of Tversky and Kahneman’s (1992) cumulative prospect theory. The probability weighting function is equal to the decision weight function in special cases, and we ignore the difference in the text for the ease of presentation.

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Titel: Prospect Theory
verfasst von: Masao Ogaki
Saori C. Tanaka
Verlag: Springer Singapore
Buch: Behavioral Economics
Print ISBN: 978-981-10-6438-8

Electronic ISBN: 978-981-10-6439-5

Copyright-Jahr: 2017
DOI: https://doi.org/10.1007/978-981-10-6439-5_4