Cumulative prospect theory's functional menagerie |
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Authors: | Henry P Stott |
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Institution: | (1) Department of Psychology, University of Warwick, Coventry, CV4 7AL, England |
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Abstract: | Many different functional forms have been suggested for both the value function and probability weighting function of Cumulative
Prospect Theory (Tversky and Kahneman, 1992). There are also many stochastic choice functions available. Since these three
components only make predictions when considered in combination, this paper examines the complete pattern of 256 model variants
that can be constructed from twenty functions. All these variants are fit to experimental data and their explanatory power
assessed. Significant interaction effects are observed. The best model has a power value function, a risky weighting function
due to Prelec (1998), and a Logit function.
JEL Classification C52 · D81 |
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Keywords: | Cumulative prospect theory Stochastic choice |
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