Absolute vs. Relative Notion of Wealth Changes

Krzysztof Kontek ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper discusses solutions derived from lottery experiments using two alternative assumptions: that people perceive wealth changes as absolute amounts of money; and that people consider wealth changes as a proportion of some reference value dependant on the context of the problem under consideration. The former assumption leads to the design of Prospect Theory, the latter - to a solution closely resembling the utility function hypothesized by Markowitz (1952). This paper presents several crucial arguments for the latter approach and provides strong arguments for rejecting the Prospect Theory paradigm.

Keywords: Prospect / Cumulative Prospect Theory; Probability Weighting Function; Markowitz Hypothesis; Aspiration / Relative Utility Function / Theory; Mental Accounts; Problem Framing and Scaling; Psychophysics; Weber’s Law; Experimental Design; Lottery; Decision Making Under Risk (search for similar items in EconPapers)
JEL-codes: C91 D01 D03 D81 D87 (search for similar items in EconPapers)
Date: 2009-09-16
New Economics Papers: this item is included in nep-cbe, nep-neu and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://mpra.ub.uni-muenchen.de/17336/1/MPRA_paper_17336.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/29764/2/MPRA_paper_29764.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/33134/2/MPRA_paper_33134.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:17336

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