The prospect theory of Kahneman and Tversky (1979) and the cumulative prospect theory of Tversky and Kahneman (1992) are descriptive models for decision making that summarize several violations of the expected utility theory. This paper gives a survey of applications of prospect theory to the...

We develop an algorithm to compute asset allocations for Kahneman and Tversky's (1979) prospect theory. An application to benchmark data as in Fama and French (1992) shows that the equity premium puzzle is resolved for parameter values similar to those found in the laboratory experiments of...

In this paper we applied the model of individual choice under ambiguity proposed by Zhang (2002) in the context of the market model of asset returns of Kwon (1985). The ambiguity is introduced via unknown volatilities of assets residual leading to two factor CAPM. We test this model on US stock...