Stochastic Dominance and Cumulative Prospect Theory

Stochastic Dominance and Cumulative Prospect Theory

We generalize and extend the second-order stochastic dominance condition for expected utility to cumulative prospect theory. The new definitions include preferences represented by S-shaped value functions, inverse S-shaped probability weighting functions, and loss aversion. The stochastic dominance...

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Bibliographische Detailangaben
Veröffentlicht in:Management Science. - Institute for Operations Research and the Management Sciences, 1954. - 52(2006), 9, Seite 1409-1423
1. Verfasser: Baucells, Manel (VerfasserIn)
Weitere Verfasser: Heukamp, Franz H.
Format: Online-Aufsatz
Sprache:English
Veröffentlicht: 2006
Zugriff auf das übergeordnete Werk:Management Science
Schlagworte:second-order stochastic dominance cumulative prospect theory value function probability weighting function Behavioral sciences Mathematics Economics
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520 |a We generalize and extend the second-order stochastic dominance condition for expected utility to cumulative prospect theory. The new definitions include preferences represented by S-shaped value functions, inverse S-shaped probability weighting functions, and loss aversion. The stochastic dominance conditions supply a framework to test different features of cumulative prospect theory. In the experimental part of the paper, we offer a test of several joint hypotheses on the value function and the probability weighting function. Assuming empirically relevant weighting functions, we can reject the inverse S-shaped value function recently advocated by Levy and Levy (2002) in favor of the S-shaped form. In addition, we find generally supporting evidence for loss aversion. Violations of loss aversion can be explained by subjects using the overall probability of winning as a heuristic. 
540 |a Copyright 2006 INFORMS 
650 4 |a second-order stochastic dominance 
650 4 |a cumulative prospect theory 
650 4 |a value function 
650 4 |a probability weighting function 
650 4 |a Behavioral sciences  |x Behavioral economics  |x Prospect theory  |x Loss aversion 
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650 4 |a Behavioral sciences  |x Behavioral economics  |x Prospect theory  |x Loss aversion 
650 4 |a Behavioral sciences  |x Behavioral economics  |x Prospect theory 
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650 4 |a Economics  |x Economic research  |x Economic analysis  |x Economic value 
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