- An Axiomatization of Cumulative Prospect Theory
- Journal of Risk and Uncertainty
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
This paper presents a method for axiomatizing a variety of models for decision making under uncertainty, including Expected Utility and Cumulative Prospect Theory. This method identifies, for each model, the situations that permit consistent inferences about the ordering of value differences. Examples of rank-dependent and sign-dependent preference patterns are used to motivate the models and the "tradeoff consistency" axioms that characterize them. The major properties of the value function in Cumulative Prospect Theory --diminishing sensitivity and loss aversion-- are contrasted with the principle of diminishing marginal utility that is commonly assumed in Expected Utility. typos: p. 166: In the first two lines of the Proof of Lemma A1 there are eight a2's. The last four should, however, be b2's. p. 167: In the proof of Theorem 6.3, starting the second paragraph, Statement (ii) of the Theorem is assumed and Statement (i) is derived.
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