Cumulative prospect theory challenges traditional expected utility theory

Saziye Gazioğlu and Nilifer Calıskan

Applied Financial Economics, 2011, vol. 21, issue 21, 1581-1586

Abstract: The Cumulative Prospect Theory (CPT) uses piecewise value functions instead of consumer utility and provides alternative assumptions for investment behaviour approximated by power value function. In this study, our aim to find a generalized value function that will make the value function introduced by Kahneman-Tversky (1992) a special case. This functional form of the value function determine the appropriate parameter of the values function. We believe that if one can approximate the original CPT value function by other types of functions, the optimization problem and the many other implications can be compared to choose the best model depending on the focus of the problems. This, eventually, could result in improving the theory in both theoretical and empirical points of views.

Keywords: utility theory; prospect theory; expected utility; portfolio optimization, (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1080/09603107.2011.583393

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