Third-generation prospect theory

Ulrich Schmidt, Chris Starmer and Robert Sugden

Open Access Publications from Kiel Institute for the World Economy from Kiel Institute for the World Economy (IfW Kiel)

Abstract: We present a new theory of decision under uncertainty: third-generation prospect theory (PT3). This retains the predictive power of previous versions of prospect theory, but extends that theory by allowing reference points to be uncertain while decision weights are specified in a rank-dependent way. We show that PT3 preferences respect a state-conditional form of stochastic dominance. The theory predicts the observed tendency for willingness-to-accept valuations of lotteries to be greater than willingness-to-pay valuations. When PT3 is made operational by using simple functional forms with parameter values derived from existing experimental evidence, it predicts observed patterns of the preference reversal phenomenon.

Keywords: Prospect theory; Preference reversal; Reference dependence (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (108)

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Journal Article: Third-generation prospect theory (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkie:28932

DOI: 10.1007/s11166-008-9040-2

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