IDEAS home Printed from https://ideas.repec.org/a/kap/theord/v94y2023i2d10.1007_s11238-022-09885-w.html
   My bibliography  Save this article

The correct formula of 1979 prospect theory for multiple outcomes

Author

Listed:
  • Peter P. Wakker

    (Erasmus University Rotterdam)

Abstract

Whereas original prospect theory was introduced over 40 years ago, its formula for multi-outcome prospects has never yet been published, resulting in many misunderstandings. This note provides that formula.

Suggested Citation

  • Peter P. Wakker, 2023. "The correct formula of 1979 prospect theory for multiple outcomes," Theory and Decision, Springer, vol. 94(2), pages 183-187, February.
    • Handle: RePEc:kap:theord:v:94:y:2023:i:2:d:10.1007_s11238-022-09885-w
    DOI: 10.1007/s11238-022-09885-w
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11238-022-09885-w
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11238-022-09885-w?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:cup:judgdm:v:2:y:2007:i::p:234-242 is not listed on IDEAS
    2. repec:feb:framed:0074 is not listed on IDEAS
    3. Glenn Harrison & E. Rutström, 2009. "Expected utility theory and prospect theory: one wedding and a decent funeral," Experimental Economics, Springer;Economic Science Association, vol. 12(2), pages 133-158, June.
    4. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    5. Gary Smith & Michael Levere & Robert Kurtzman, 2009. "Poker Player Behavior After Big Wins and Big Losses," Management Science, INFORMS, vol. 55(9), pages 1547-1555, September.
    6. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    7. Rieger, Marc Oliver, 2014. "Evolutionary stability of prospect theory preferences," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 1-11.
    8. John D. Hey & Gianna Lotito & Anna Maffioletti, 2018. "The descriptive and predictive adequacy of theories of decision making under uncertainty/ambiguity," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 8, pages 189-219, World Scientific Publishing Co. Pte. Ltd..
    9. Mahesh Nagarajan & Steven Shechter, 2014. "Prospect Theory and the Newsvendor Problem," Management Science, INFORMS, vol. 60(4), pages 1057-1062, April.
    10. Fishburn, Peter C, 1978. "On Handa's "New Theory of Cardinal Utility" and the Maximization of Expected Return," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 321-324, April.
    11. Glenn W Harrison & John A List & Charles Towe, 2007. "Naturally Occurring Preferences and Exogenous Laboratory Experiments: A Case Study of Risk Aversion," Econometrica, Econometric Society, vol. 75(2), pages 433-458, March.
    12. Blondel, Serge, 2002. "Testing Theories of Choice under Risk: Estimation of Individual Functionals," Journal of Risk and Uncertainty, Springer, vol. 24(3), pages 251-265, May.
    13. N. Grishina & C. A. Lucas & P. Date, 2017. "Prospect theory–based portfolio optimization: an empirical study and analysis using intelligent algorithms," Quantitative Finance, Taylor & Francis Journals, vol. 17(3), pages 353-367, March.
    14. David Blake & Edmund Cannon & Douglas Wright, 2021. "Quantifying loss aversion: Evidence from a UK population survey," Journal of Risk and Uncertainty, Springer, vol. 63(1), pages 27-57, August.
    15. Enrico Giorgi & Thorsten Hens & János Mayer, 2007. "Computational aspects of prospect theory with asset pricing applications," Computational Economics, Springer;Society for Computational Economics, vol. 29(3), pages 267-281, May.
    16. Serge Blondel, 2002. "Testing Theories of Choice Under Risk: Estimation of Individual Functionals," Journal of Risk and Uncertainty, Springer, vol. 24(3), pages 251-265, May.
    17. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages 251-278, October.
    18. Marc Rieger & Mei Wang, 2008. "Prospect theory for continuous distributions," Journal of Risk and Uncertainty, Springer, vol. 36(1), pages 83-102, February.
    19. Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 167-196, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wakker, Peter P., 2023. "A criticism of Bernheim & Sprenger's (2020) tests of rank dependence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 107(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jakusch, Sven Thorsten & Meyer, Steffen & Hackethal, Andreas, 2019. "Taming models of prospect theory in the wild? Estimation of Vlcek and Hens (2011)," SAFE Working Paper Series 146, Leibniz Institute for Financial Research SAFE, revised 2019.
    2. Wakker, Peter P., 2023. "A criticism of Bernheim & Sprenger's (2020) tests of rank dependence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 107(C).
    3. Chao Gong & Chunhui Xu & Ji Wang, 2018. "An Efficient Adaptive Real Coded Genetic Algorithm to Solve the Portfolio Choice Problem Under Cumulative Prospect Theory," Computational Economics, Springer;Society for Computational Economics, vol. 52(1), pages 227-252, June.
    4. Jakusch, Sven Thorsten, 2017. "On the applicability of maximum likelihood methods: From experimental to financial data," SAFE Working Paper Series 148, Leibniz Institute for Financial Research SAFE, revised 2017.
    5. Oliver, Adam, 2003. "The internal consistency of the standard gamble: tests after adjusting for prospect theory," LSE Research Online Documents on Economics 159, London School of Economics and Political Science, LSE Library.
    6. Che-Yuan Liang, 2017. "Optimal inequality behind the veil of ignorance," Theory and Decision, Springer, vol. 83(3), pages 431-455, October.
    7. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
    8. Michael Birnbaum, 2005. "A Comparison of Five Models that Predict Violations of First-Order Stochastic Dominance in Risky Decision Making," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 263-287, December.
    9. M. Pelé & M. Broihanne & B. Thierry & J. Call & V. Dufour, 2014. "To bet or not to bet? Decision-making under risk in non-human primates," Journal of Risk and Uncertainty, Springer, vol. 49(2), pages 141-166, October.
    10. Jou, Rong-Chang & Chen, Ke-Hong, 2013. "An application of cumulative prospect theory to freeway drivers’ route choice behaviours," Transportation Research Part A: Policy and Practice, Elsevier, vol. 49(C), pages 123-131.
    11. repec:cup:judgdm:v:12:y:2017:i:2:p:118-127 is not listed on IDEAS
    12. Massimiliano Kaucic & Filippo Piccotto & Gabriele Sbaiz & Giorgio Valentinuz, 2023. "Optimal Portfolio with Sustainable Attitudes under Cumulative Prospect Theory," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 13(4), pages 1-4.
    13. Petraud, Jean & Boucher, Stephen & Carter, Michael, 2015. "Competing theories of risk preferences and the demand for crop insurance: Experimental evidence from Peru," 2015 Conference, August 9-14, 2015, Milan, Italy 211383, International Association of Agricultural Economists.
    14. Trabelsi, Mohamed Ali, 2006. "Les nouveaux modèles de décision dans le risque et l’incertain : quel apport ? [The new models of decision under risk or uncertainty : What approach?]," MPRA Paper 25442, University Library of Munich, Germany.
    15. Ryan O. Murphy & Robert H. W. ten Brincke, 2018. "Hierarchical Maximum Likelihood Parameter Estimation for Cumulative Prospect Theory: Improving the Reliability of Individual Risk Parameter Estimates," Management Science, INFORMS, vol. 64(1), pages 308-328, January.
    16. Olivier L’Haridon & Lætitia Placido, 2010. "Betting on Machina’s reflection example: an experiment on ambiguity," Theory and Decision, Springer, vol. 69(3), pages 375-393, September.
    17. Adrian Bruhin & Maha Manai & Luís Santos-Pinto, 2022. "Risk and rationality: The relative importance of probability weighting and choice set dependence," Journal of Risk and Uncertainty, Springer, vol. 65(2), pages 139-184, October.
    18. Dertwinkel-Kalt, Markus & Köster, Mats, 2015. "Violations of first-order stochastic dominance as salience effects," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 59(C), pages 42-46.
    19. Peter P. Wakker, 2008. "Explaining the characteristics of the power (CRRA) utility family," Health Economics, John Wiley & Sons, Ltd., vol. 17(12), pages 1329-1344.
    20. Tamás Csermely & Alexander Rabas, 2016. "How to reveal people’s preferences: Comparing time consistency and predictive power of multiple price list risk elicitation methods," Journal of Risk and Uncertainty, Springer, vol. 53(2), pages 107-136, December.
    21. Oliver, Adam, 2003. "The internal consistency of the standard gamble: tests after adjusting for prospect theory," Journal of Health Economics, Elsevier, vol. 22(4), pages 659-674, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:theord:v:94:y:2023:i:2:d:10.1007_s11238-022-09885-w. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.