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Prospect theory in the wild: how good is the nonexperimental evidence for prospect theory?

Andre Hofmeyr and Harold Kincaid

Journal of Economic Methodology, 2019, vol. 26, issue 1, 13-31

Abstract: Prospect theory is widely thought to be one of the best-confirmed accounts of human decision-making under risk. There are numerous claims in the literature that various kinds of nonexperimental, observational evidence provide strong support for prospect theory. We investigate the veracity of these claims using a set of philosophy of science morals and a careful delineation of models of choice under risk, focussing on the extant versions of prospect theory and their various components. We challenge the claim that prospect theory is well supported because it explains the equity premium puzzle. In addition, we analyse a major international survey thought to support prospect theory and argue that the support is questionable, both for statistical reasons and because the evidence itself is mixed. Our analyses highlight some important ideas in the philosophy of science and caution against strong claims about support for prospect theory that rely on nonexperimental, observational evidence.

Date: 2019
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DOI: 10.1080/1350178X.2018.1561072

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