The prospect theory is one of the most popular decision-making theories. It is based on the S-shaped utility function, unlike the von Neumann and Morgenstern (NM) theory, which is based on the concave utility function. The S-shape brings in mathematical challenges: simple extensions and...

If a decision maker, in a world of uncertainty à la Anscombe and Aumann (1963), can choose acts according to some objective probability distribution (by throwing dice for instance) from any given set of acts, then there is no set of acts that allows an experimenter to test more than the Axiom...

We test the implications of ambiguity aversion in a principal-agent problem with multiple agents. Models of ambiguity aversion suggest that, under ambiguity, comparative compensation schemes may become more attractive than independent wage contracts. We test this by presenting agents with a...

The completeness axiom of choice has been questioned for long, and in response, theoretical models of decision making allowing for incomplete preferences have been developed. So far the theoretical accomplishments have however not been paired with empirical evidence on the actual existence of...

The origin of prospect theory is the desire to test the intuitive statistician in the real world. The development of this theory by the cognitive psychologists Kahneman and Tversky can be traced to the former's work in cognitive psychophysics, in which deviations from average behavior are termed...

Different models of uncertainty aversion imply strikingly different economic behavior. The key to understanding these differences lies in the dichotomy between first-order and second-order ambiguity aversion which I define here. My definition and its characterization are independent of specific...

Almost all important decisions in people’s lives entail risky and delayed consequences. Regardless of whether we make choices involving health, wealth, love or education, almost every choice involves costs and benefits that are uncertain and materialize over time. Because risk and delay often...

We provide an axiomatic approach to a belief formation process in an informational environment characterized by limited, heterogenous and differently precise information. For a list of previously observed cases an agent needs to express her belief by assigning probabilities to possible outcomes....

We examine risk taking when the bank's preferences exhibit smooth ambiguity aversion. Ambiguity is modeled by a second-order probability distribution that captures the bank's uncertainty about which of the subjective beliefs govern the financial asset return risk. Ambiguity preferences are...

An agent wants to derive her belief over outcomes based on past observations collected in her database (memory). There is well establish evidence in the psychology and marketing literature that agents consistently fail (or choose not) to process all available information. An agent might be...