The aim of this paper is to introduce prospect theory in a game theoretic framework. We address the complexity of the weighting function by restricting the object of our analysis to a 2-player 2-strategy game, in order to derive some core results. We find that dominant and indifferent strategies...

Despite many applications of prospect theory's concepts to explain political and strategic phenomena, formal analyses of strategic problems using prospect theory are rare. Using Fearon's model of bargaining, Tversky and Kahneman's value function, and an existing probability weighting function, I...

This paper tests whether utility is the same for risk and for uncertainty. This test is critical for models that capture ambiguity aversion through a difference in event weighting between risk and uncertainty, like the multiple priors models and prospect theory. We present a new method to...

Deviations from normality in financial return series have led to the development of alternative portfolio selection models. One such model is the downside risk model, whereby the investor maximizes his return given a downside risk constraint. In this paper we empirically observe the...

Risk aversion—but also the higher-order risk preferences of prudence and temperance—are fundamental concepts in the study of economic decision making. We propose a method to jointly measure the intensity of risk aversion, prudence, and temperance. Our theoretical approach is to define risk...

Markowitz (Journal of Political Economy 60:151–158, <CitationRef CitationID="CR27">1952</CitationRef>) identified a fourfold pattern of risk preferences in outcome magnitude: When outcomes are large, people are risk averse in gains and risk seeking in losses, but risk preferences reverse when the outcomes are small, with people...</citationref>

This paper merges the non-expected utility approach (Tversky and Kahneman, J Risk Uncertain 5:297–323, <CitationRef CitationID="CR17">1992</CitationRef> and Quiggin, J Econ Behav Organ 3:323–343, <CitationRef CitationID="CR14">1982</CitationRef>) into Akerlof’s (Quart J Econ 84:488–500, <CitationRef CitationID="CR2">1970</CitationRef>) model of Market for Lemons. We derive the results for different probability...</citationref></citationref></citationref>

This study extends experimental tests of (cumulative) prospect theory (PT) over prospects with more than three outcomes and tests second-order stochastic dominance principles (Levy and Levy, Management Science 48:1334–1349, <CitationRef CitationID="CR44">2002</CitationRef>; Baucells and Heukamp, Management Science 52:1409–1423, <CitationRef CitationID="CR10">2006</CitationRef>)....</citationref></citationref>

The house-money effect, understood as people’s tendency to be more daring with easily-gotten money, is a behavioral pattern that poses questions about the external validity of experiments in economics: to what extent do people behave in experiments like they would have in a real-life...

This paper reports on the results of an experimental elicitation at the individual level of all prospect theory components (i.e., utility, loss aversion, and weighting functions) in two decision contexts: situations where alternatives are described as probability distributions and situations...