Commutative Prospect Theory and Stopped Behavioral Processes for Fair Gambles

Godfrey Cadogan

MPRA Paper from University Library of Munich, Germany

Abstract: We augment Tversky and Khaneman (1992) (“TK92”) Cumulative Prospect Theory (“CPT”) function space with a sample space for “states of nature”, and depict a commutative map of behavior on the augmented space. In particular, we use a homotopy lifting property to mimic behavioral stochastic processes arising from deformation of stochastic choice into outcome. A psychological distance metric (in the class of Dudley-Talagrand inequalities) popularized by Norman (1968); Nosofsky and Palmeri (1997), for stochastic learning, was used to characterize stopping times for behavioral processes. In which case, for a class of nonseparable space-time probability density functions, based on psychological distance, and independently proposed by Baucells and Heukamp (2009), we find that behavioral processes are uniformly stopped before the goal of fair gamble is attained. Further, we find that when faced with a fair gamble, agents exhibit submartingale [supermartingale] behavior, subjectively, under CPT probability weighting scheme. We show that even when agents’ have classic von Neuman-Morgenstern preferences over probability distribution, and know that the gamble is a martingale, they exhibit probability weighting to compensate for probability leakage arising from the their stopped behavioral process.

Keywords: commutative prospect theory; homotopy; stopping time; behavioral stochastic process (search for similar items in EconPapers)
JEL-codes: C0 C02 D03 D70 D81 (search for similar items in EconPapers)
Date: 2010-04-26
New Economics Papers: this item is included in nep-evo, nep-neu, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/22342/1/MPRA_paper_22342.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/22351/1/MPRA_paper_22351.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/22388/1/MPRA_paper_22388.pdf revised version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:22342

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().