Economics Seminar: Composite Prospect Theory
- When?
- Wednesday 8 December 2010, 16:00 to 17:00
- Where?
- 04AD00
- Open to:
- Public, Staff, Students
- Speaker:
- Dr Ali Al–Nowaihi (University of Leicester)
Dr Ali Al–Nowaihi (University of Leicester)
Abstract
Evidence suggests three stylized facts, S1, S2a, S2b that apply to a wide, important, domain of problems. People overweight low probabilities and underweight high probabilities (S1). Many people ignore events of extremely low probability and treat extremely high probability events as certain (S2a), while others are influenced by the size of outcomes, even when probabilities are extremely low (S2b). No decision theory gives a satisfactory joint account of S1, S2a, S2b. We propose composite cumulative prospect theory (CCP) that accounts jointly for S1, S2a, S2b. We discuss several applications of CCP, including insurance behavior, the class of Becker-paradoxes, the Allais-paradox and the St. Petersburg-paradox. CCP explains everything that expected utility, rank dependent utility, prospect theory and cumulative prospect theory do; the converse is false.