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)

"Composite Prospect Theory"

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.

Date:
Wednesday 8 December 2010
Time:

16:00 to 17:00


Where?
04AD00
Open to:
Public, Staff, Students
Speaker:
Dr Ali Al–Nowaihi (University of Leicester)