Risk Aversion in Cumulative Prospect Theory

Risk Aversion in Cumulative Prospect Theory

This paper characterizes the conditions for strong risk aversion and second-order stochastic dominance for cumulative prospect theory. Strong risk aversion implies a convex weighting function for gains and a concave one for losses. It does not necessarily imply a concave utility function. The latter...

Ausführliche Beschreibung

Bibliographische Detailangaben
Veröffentlicht in:Management Science. - Institute for Operations Research and the Management Sciences, 1954. - 54(2008), 1, Seite 208-216
1. Verfasser: Schmidt, Ulrich (VerfasserIn)
Weitere Verfasser: Zank, Horst
Format: Online-Aufsatz
Sprache:English
Veröffentlicht: 2008
Zugriff auf das übergeordnete Werk:Management Science
Schlagworte:cumulative prospect theory loss aversion risk aversion second-order stochastic dominance decision analysis theory risk Economics Mathematics Behavioral sciences Information science
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520 |a This paper characterizes the conditions for strong risk aversion and second-order stochastic dominance for cumulative prospect theory. Strong risk aversion implies a convex weighting function for gains and a concave one for losses. It does not necessarily imply a concave utility function. The latter does follow if the weighting functions are continuous. By investigating the exact relationship between loss aversion and strong risk aversion, a natural index for the degree of loss aversion is derived. 
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