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The Time Importance for Prospect Theory

Jos\'e Cl\'audio do Nascimento

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Abstract: This paper highlights that dynamic gambles can affect perceptions and reveal behaviors that Kahneman and Tversky's Prospect Theory does not describe. The model discussed here relates the Tsallis entropy to the Kelly's rate to evaluate whether individuals prospect risk situations through nonadditive dynamics or not. Then, psychology students answer a questionnaire where additive prospects have null contrast, but other dynamics can present very high contrast. Thus, we can note that a simple approximation between the losses and the reference point leads individuals to risk aversion. This behavior contradicts the risk seeking predicted by Prospect Theory. In addition, the experiments show that two of the behaviors in the fourfold pattern of risk attitudes also are violated. In essence, this work reveals that individuals can prospect nonadditive dynamics in their gambles when the results are close (or beyond) to the reference point. This dynamic aspect violates any additive prospect models.

Date: 2019-08, Revised 2021-08
New Economics Papers: this item is included in nep-upt
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Handle: RePEc:arx:papers:1908.01709