Co-monotonicity of optimal investments and the design of structured financial products

Marc Oliver Rieger
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Marc Oliver Rieger: University of Zurich

No 07-29, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study how the framework of classical game theory changes when the preferences of the players are described by Prospect Theory instead of Expected Utility Theory. Specifically, we study the influence of framing effect and probability weighting on the existence and specific structure of Nash equilibria in pure and mixed strategies for finite games. We demonstrate that in games representing typical interactions in societies, probability weighting of the players can lead to larger common wealth and is, under weak assumptions,evolutionary stable. This observation may provide a possible explanation for the validity of Prospect Theory as a descriptive model in human behavior.

Keywords: Prospect Theory; Existence of Nash Equilibria; Evolutionary stability. (search for similar items in EconPapers)
JEL-codes: C70 C73 D81 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2007-09
New Economics Papers: this item is included in nep-gth and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0729

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