Third-generation prospect theory

Schmidt, Ulrich, Starmer, Chris and Sugden, Robert (2008) Third-generation prospect theory. Journal of Risk and Uncertainty, 36 (3). pp. 203-223.

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Abstract

We present a new theory of decision under uncertainty: third-generation prospect theory (PT3). This retains the predictive power of previous versions of prospect theory, but extends that theory by allowing reference points to be uncertain while decision weights are specified in a rank-dependent way. We show that PT3 preferences respect a state-conditional form of stochastic dominance. The theory predicts the observed tendency for willingness-to-accept valuations of lotteries to be greater than willingness-to-pay valuations. When PT3 is made operational by using simple functional forms with parameter values derived from existing experimental evidence, it predicts observed patterns of the preference reversal phenomenon.

Item Type:	Article
Faculty \ School:	Faculty of Social Sciences > School of Economics
UEA Research Groups:	Faculty of Social Sciences > Research Groups > Economic Theory Faculty of Social Sciences > Research Centres > Centre for Behavioural and Experimental Social Sciences Faculty of Social Sciences > Research Centres > Centre for Competition Policy Faculty of Social Sciences > Research Groups > Behavioural Economics
Depositing User:	Gina Neff
Date Deposited:	13 Jan 2011 11:08
Last Modified:	22 Apr 2023 01:09
URI:	https://ueaeprints.uea.ac.uk/id/eprint/18410
DOI:	10.1007/s11166-008-9040-2

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