Classic financial agency theory recommends compensation through stock options rather than shares to induce risk neutrality in otherwise risk averse agents. In an experiment, we find that subjects acting as executives do also take risks that are excessive from the perspective of shareholders if...

A critical element in all discounted utility models is the specification of a discount function. We extend the standard model to allow for reference points for both out- comes and time. We consider the axiomatic foundations and properties of two main classes of discount functions. The first, the...

We consider a discounted utility model that has two components. (1) The instan- taneous utility is of the prospect theory form, thus, allowing for reference dependent outcomes. (2) The discount function embodies a ‘reference time’ to which all future outcomes are discounted back to, hence,...

We systematically explore decision situations in which a decision maker bears responsibility for somebody else's outcomes as well as for her own in situations of payoff equality. In the gain domain we confirm the intuition that being responsible for somebody else's payoffs increases risk...

A critical element in all discounted utility models is the specification of a discount function. We introduce three functions: the delay, speedup and generating functions. Each can be uniquely elicited from behaviour. The delay function determines stationary and the common difference effect. The...

The Becker proposition (BP) is one of the founding pillars of the modern literature on Law and Economics. It states that it is optimal to impose the severest possible punishment (to maintain effective deterrence) at the lowest possible probability (to economize on enforcement costs). The BP is...

Prospect theory is the main behavioral alternative to expected utility. Tversky and Kahnemann (1992) motivate the utility function for gains and losses under prospect theory by using the axiom of preference homogeneity. However, they do not provide the formal proof. We provide the relevant...

This paper selectively reviews the literature on behavioural finance, focusing on the aggregate market implications of the behavioural biases that this literature has identified. Advocates of behavioural economics and finance argue that economic agents behave in a way which departs significantly...

Since Kahneman and Tversky (1979), it has been generally recognized that decision makers overweight low probabilities and underweight high probabilities. Of the several weighting functions that have been proposed, that of Prelec (1998) has the attractions that it is parsimonious, consistent with...

Evidence shows that (i) people overweight low probabilities and underweight high probabilities, but (ii) ignore events of extremely low probability and treat extremely high probability events as certain. Decision models, such as rank dependent utility (RDU) and cumulative prospect theory (CP),...