A further examination of cumulative prospect theory parameterizations

William Neilson, Jill Stowe

Research output: Contribution to journalArticlepeer-review

82 Scopus citations

Abstract

Recent experimental studies have focused on fitting parameterized functional forms to cumulative prospect theory's weighting function. This paper examines the behavioral implications of the functional forms and the estimated parameters. We find that none of the parameterizations can simultaneously account for gambling on unlikely gains and the Allais paradox behavior or other strong choice patterns from experiments. Parameter estimates that lead to reasonable amounts of insurance and gambling behavior tend to also generate large risk premia. Taken as a whole, the analysis suggests that the functional forms proposed in the literature are not suitable for generalization to applied settings.

Original languageEnglish
Pages (from-to)31-46
Number of pages16
JournalJournal of Risk and Uncertainty
Volume24
Issue number1
DOIs
StatePublished - 2002

Bibliographical note

Funding Information:
We are grateful to an anonymous referee for helpful comments, and to the Private Enterprise Research Center at Texas A&M for financial support.

Keywords

  • Allais paradox
  • Cumulative prospect theory
  • Expected utility theory
  • Probability weighting function
  • Rank-dependent utility
  • Risk attitudes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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