Journal Article

A Simple Model of Cumulative Prospect Theory

Authors

  • H. Zank
  • Ulrich Schmidt
Publication Date

The present paper combines loss attitudes and linear utility by providing an axiomatic analysis of cumulative prospect theory in the framework for decision under uncertainty. We derive a two-sided variant of Choquet expected utility with possibly different capacities for gains and for losses, and linear utility. Naturally, utility may have a kink at the status quo, which allows for the exhibition of loss aversion. The central condition of our model is termed independence of common increments.

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JEL Classification
D81

Key Words

  • comonotonic sure thing principle
  • cumulative prospect theory
  • linear utility
  • loss aversion