We show that security-potential-aspiration theory (SP/A) and cumulative prospect theory (CPT), although based on very different psychological principles are mathematically very similar when studied in the appropriate framework. This helps to interpret results on portfolio optimization under...

The paper first shows that financial market equilibria need not to exist if agents possess cumulative prospect theory preferences with piecewise-power value functions. This is due to the boundary behavior of the cumulative prospect theory value function, which might cause an infinite...

Ambiguity aversion has been suggested as a potential explanation for the equity premium puzzle in recent theoretical models. To test this hypothesis, we measure the amount of ambiguity aversion in a large-scale international survey. A comparison to the average equity premia in these countries...