The course focuses on Prospect Theory, one of the most popular descriptive generalizations of expected utility theory, the standard model of rational choice under risk (known probabilities) and ambiguity (unknown probabilities). More specifically, the course has two objectives:
- providing a unified formal setup that can help easily understanding where Prospect Theory deviates from expected utility and rankdependent utility;
- giving the basic tools allowing to test and/or measure individual preferences under risk and uncertainty without assuming expected utility.
- Preference relations on Cartesian products and properties
- Substitution consistency
- Additive preferences
- Application to expected utility and intertemporal choice
Prospect Theory and Elicitation Techniques
- Original Prospect Theory (Kahneman and Tversky, 1979)
- Prospect Theory for Risk
- Prospect Theory for Ambiguity
- Eliciting ambiguity attitudes under Prospect Theory
Dimmock, Stephen G., Roy Kouwenberg, & Peter P. Wakker (2015) “Ambiguity Attitudes in a Large Representative Sample: Measurement and an Application to the Non-Participation Puzzle,”Management Science (forthcoming).
Keeney, Ralph & Howard Raiffa (1976): Decisions with Multiple Objectives. Wiley, New York (2nd edition 1993, Cambridge University Press, Cambridge).
Simon, French (1988): Decision Theory: An Introduction to the Mathematics of Rationality (Mathematics and its Applications), Ellis Horwood.
Tversky, Amos & Daniel Kahneman (1992) “Advances in Prospect Theory: Cumulative Representation of Uncertainty,” Journal of Risk and Uncertainty 5, 297–323.
Wakker, Peter (2010): Additive Representations of Preferences: A New Foundation of Decision Analysis, Springer.
Wakker, Peter (1989, 2010): Prospect Theory for Risk and Ambiguity, Cambridge.