The Utility Function Under Prospect Theory

Ali al-Nowaihi (), Ian Bradley () and Sanjit Dhami

No 06/15, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: Prospect theory is the main behavioral alternative to expected utility. Tversky and Kahnemann (1992) motivate the utility function for gains and losses under prospect theory by using the axiom of preference homogeneity. However, they do not provide the formal proof. We provide the relevant proof. Furthermore, we show that the utility function under preference homogeneity obeys an additional and important restriction that is not noted by Tversky and Kahnemann (1992). This simplifies the use of prospect theory by reducing the number of free parameters by one.

Keywords: Prospect Theory; Preference homogeneity; Functional equations (search for similar items in EconPapers)
JEL-codes: C60 D81 (search for similar items in EconPapers)
Date: 2006-11
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp06-15.pdf (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:lec:leecon:06/15

Ordering information: This working paper can be ordered from
https://www2.le.ac.u ... -1/discussion-papers

Access Statistics for this paper

More papers in Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester School of Business, University of Leicester, University Road. Leicester. LE1 7RH. UK Provider-Homepage: https://le.ac.uk/school-of-business. Contact information at EDIRC.
Bibliographic data for series maintained by Abbie Sleath ().