Stochastic dominance and expected utility: survey and analysis
Management Science
Microscopic Simulation of Financial Markets: From Investor Behavior to Market Phenomena
Microscopic Simulation of Financial Markets: From Investor Behavior to Market Phenomena
Stochastic Dominance and Cumulative Prospect Theory
Management Science
A Prospect Theory Model of Resource Allocation
Decision Analysis
Extreme events and entropy: A multiple quantile utility model
International Journal of Approximate Reasoning
Proceedings of the Winter Simulation Conference
Individual vs. Aggregate Preferences: The Case of a Small Fish in a Big Pond
Management Science
Understanding insiders: An analysis of risk-taking behavior
Information Systems Frontiers
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Prospect theory is a paradigm challenging the expected utility paradigm. One of the fundamental components of prospect theory is the S-shaped value function. The value function is mainly justified by experimental investigation of the certainty equivalents of prospects confined either to the negative or to the positive domain, but not of mixed prospects, which characterize most actual investments. We conduct an experimental study withmixed prospects, using, for the first time, recently developed investment criteria called Prospect Stochastic Dominance (PSD) and Markowitz Stochastic Dominance (MSD). We reject the S-shaped value function, showing thatat least 62%--76% of the subjects cannot be characterized by such preferences. We find support for the Markowitz utility function, which is a reversed S-shaped function--exactly the opposite of the prospect theory value function. It is possible that the previous results supporting the S-shaped value function are distorted because the prospects had only positive or only negative outcomes, presenting hypothetical situations which individuals do not usually face, and which are certainly not common in financial markets.