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A genuine foundation for prospect theory

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  • Ulrich Schmidt
  • Horst Zank

Abstract

In most models of (cumulative) prospect theory, reference dependence of preferences is imposed beforehand and the location of the reference point is determined exogenously. This paper presents principles that provide critical tests and foundations for prospect theory preferences without assuming reference-dependent preferences a priori. Instead, reference dependence is derived from behavior and the reference point arises endogenously. Copyright Springer Science+Business Media New York 2012

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  • Ulrich Schmidt & Horst Zank, 2012. "A genuine foundation for prospect theory," Journal of Risk and Uncertainty, Springer, vol. 45(2), pages 97-113, October.
    • Handle: RePEc:kap:jrisku:v:45:y:2012:i:2:p:97-113
    DOI: 10.1007/s11166-012-9150-8
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    Cited by:

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    2. Geiger, Gebhard, 2015. "Risk pricing in a non-expected utility framework," European Journal of Operational Research, Elsevier, vol. 246(3), pages 944-948.
    3. Lorenzo Bastianello & Alain Chateauneuf & Bernard Cornet, 2023. "Gain-Loss Hedging and Cumulative Prospect Theory," Papers 2304.14843, arXiv.org.
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    6. Mehrmann, Annika & Sureth-Sloane, Caren, 2017. "Tax loss offset restrictions and biased perception of risky investments," arqus Discussion Papers in Quantitative Tax Research 222, arqus - Arbeitskreis Quantitative Steuerlehre.
    7. Andreas Hack & Frauke Bieberstein & Nils D. Kraiczy, 2016. "Reference point formation and new venture creation," Small Business Economics, Springer, vol. 46(3), pages 447-465, March.
    8. Douadia Bougherara & Xavier Gassmann & Laurent Piet, 2011. "A structural estimation of French farmers’ risk preferences: an artefactual field experiment," Working Papers SMART 11-06, INRAE UMR SMART.
    9. Jacobs Martin, 2016. "Accounting for Changing Tastes: Approaches to Explaining Unstable Individual Preferences," Review of Economics, De Gruyter, vol. 67(2), pages 121-183, August.
    10. Bastianello, Lorenzo & Chateauneuf, Alain & Cornet, Bernard, 2024. "Gain–loss hedging and cumulative prospect theory," Mathematical Social Sciences, Elsevier, vol. 131(C), pages 40-47.
    11. Caspar G. Chorus, 2014. "Capturing alternative decision rules in travel choice models: a critical discussion," Chapters, in: Stephane Hess & Andrew Daly (ed.), Handbook of Choice Modelling, chapter 13, pages 290-310, Edward Elgar Publishing.

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    More about this item

    Keywords

    Diminishing sensitivity; Prospect theory; Reference dependence; Reference point; Utility; D81;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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