In this paper, we explain main concepts of Prospect Theory and Cumulative Prospect Theory within the rational dynamic … asset pricing framework. We derive option pricing formulas when asset returns are altered by a generalized Prospect Theory … Theory value functions and probability weighting functions consistent with rational dynamic pricing theory. After the …

In this paper we address three main objections of behavioral finance to the theory of rational finance, considered as … “anomalies” the theory of rational finance cannot explain: (i) Predictability of asset returns; (ii) The Equity Premium; (iii … are the only possible explanations of the “anomalies”, but offer statistical models within the rational theory of finance …