Empirical evidence has shown that people are unwilling to insure rare losses at subsidized premiums and at the same time take-up insurance for moderate risks at highly loaded premiums. This paper explores whether prospect theory, in particular diminishing sensitivity and loss aversion, can...

This paper provides preference foundations for parametric weighting functions under rankdependent utility. This is achieved by decomposing the independence axiom of expected utility into separate meaningful properties. These conditions allow us to characterize rank-dependent utility with power...

In previous models of (cumulative) prospect theory reference-dependence of preferences is imposed beforehand and the location of the reference point is exogenously determined. This note provides a foundation of prospect theory, where reference-dependence is derived from preference conditions and...

There is a large literature showing that willingness-to-accept (WTA) is usually much higher than willingness-to-pay (WTP) in empirical studies although they should be roughly equal according to traditional economic theory. A second stream of literature shows that people are typically ambiguity...

This paper analyzes insurance demand under prospect theory in a simple model with two states of the world and fair insurance contracts. We argue that two different reference points are reasonable in this framework, state-dependent initial wealth or final wealth after buying full insurance....