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Cumulative prospect theory challenges traditional expected utility theory

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  • Saziye Gazioğlu
  • Nilifer Calıskan

Abstract

The Cumulative Prospect Theory (CPT) uses piecewise value functions instead of consumer utility and provides alternative assumptions for investment behaviour approximated by power value function. In this study, our aim to find a generalized value function that will make the value function introduced by Kahneman-Tversky (1992) a special case. This functional form of the value function determine the appropriate parameter of the values function. We believe that if one can approximate the original CPT value function by other types of functions, the optimization problem and the many other implications can be compared to choose the best model depending on the focus of the problems. This, eventually, could result in improving the theory in both theoretical and empirical points of views.

Suggested Citation

  • Saziye Gazioğlu & Nilifer Calıskan, 2011. "Cumulative prospect theory challenges traditional expected utility theory," Applied Financial Economics, Taylor & Francis Journals, vol. 21(21), pages 1581-1586.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:21:p:1581-1586
    DOI: 10.1080/09603107.2011.583393
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    References listed on IDEAS

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    1. Antoni Bosch & Joaquim Silvestre, 2003. "Do the Wealthy Risk More Money? An Experimental Comparison," Working Papers 10, Barcelona School of Economics.
    2. Enrico Giorgi & Thorsten Hens, 2006. "Making prospect theory fit for finance," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(3), pages 339-360, September.
    3. 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.
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