In Cumulative Prospect Theory, risk attitudes follow from the integration of the value function and of the probability distortions caused by the probability weighting function. However, textbooks and popular science books discuss the two functions separately, emphasize the role of the value function on risk attitudes, and exemplify the role of the probability distortions only for very low probabilities. In this paper, we calculate the probability thresholds that determine risk attitude inversions – with respect to those expected from the value function alone. Those thresholds were never reported explicitly in previous literature. We show that risk attitudes inversions can occur for simple prospects with quite high probabilities of the outcome (in some instances, up to 70%). A survey circulated to university teachers of prospect theory showed that risk attitudes inversions at those levels of probability are not commonly taken into consideration.

Probability thresholds between risk attitudes in Cumulative Prospect Theory

Anna Maria Cherubini
2022

Abstract

In Cumulative Prospect Theory, risk attitudes follow from the integration of the value function and of the probability distortions caused by the probability weighting function. However, textbooks and popular science books discuss the two functions separately, emphasize the role of the value function on risk attitudes, and exemplify the role of the probability distortions only for very low probabilities. In this paper, we calculate the probability thresholds that determine risk attitude inversions – with respect to those expected from the value function alone. Those thresholds were never reported explicitly in previous literature. We show that risk attitudes inversions can occur for simple prospects with quite high probabilities of the outcome (in some instances, up to 70%). A survey circulated to university teachers of prospect theory showed that risk attitudes inversions at those levels of probability are not commonly taken into consideration.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11587/472225
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