The Data of Levy and Levy (2002) “Prospect Theory: Much Ado About Nothing?” Actually Support Prospect Theory

Peter Wakker

Chapter 8 in Handbook of the Fundamentals of Financial Decision Making:In 2 Parts, 2013, pp 145-147 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Levy and Levy (Management Science 2002) present data that, according to their claims, violate prospect theory. They suggest that prospect theory's hypothesis of an S-shaped value function, concave for gains and convex for losses, is incorrect. However, all the data of Levy and Levy are perfectly consistent with the predictions of prospect theory, as can be verified by simply applying prospect theory formulas. The mistake of Levy and Levy is that they, incorrectly, thought that probability weighting could be ignored.

Keywords: Financial Decision Making; Asset Pricing; Prospect Theory; Utility Theory; Risk Aversion; Static Portfolio Theory; Stochastic Dominance; Dynamic Modeling; Dynamic Portfolio Theory; Tactical Asset Allocation; Kelly Strategy; Capital Growth (search for similar items in EconPapers)
Date: 2013
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Journal Article: The Data of Levy and Levy (2002) ÜProspect Theory: Much Ado About Nothing?Ý Actually Support Prospect Theory (2003)
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