Munich Personal RePEc Archive

Commutative Prospect Theory and Stopped Behavioral Processes for Fair Gambles

Cadogan, Godfrey (2010): Commutative Prospect Theory and Stopped Behavioral Processes for Fair Gambles.

WarningThere is a more recent version of this item available.
[img]
Preview
PDF
MPRA_paper_22342.pdf

Download (227kB) | Preview

Abstract

We augment Tversky and Khaneman (1992) (“TK92”) Cumulative Prospect Theory (“CPT”) function space with a sample space for “states of nature”, and depict a commutative map of behavior on the augmented space. In particular, we use a homotopy lifting property to mimic behavioral stochastic processes arising from deformation of stochastic choice into outcome. A psychological distance metric (in the class of Dudley-Talagrand inequalities) popularized by Norman (1968); Nosofsky and Palmeri (1997), for stochastic learning, was used to characterize stopping times for behavioral processes. In which case, for a class of nonseparable space-time probability density functions, based on psychological distance, and independently proposed by Baucells and Heukamp (2009), we find that behavioral processes are uniformly stopped before the goal of fair gamble is attained. Further, we find that when faced with a fair gamble, agents exhibit submartingale [supermartingale] behavior, subjectively, under CPT probability weighting scheme. We show that even when agents’ have classic von Neuman-Morgenstern preferences over probability distribution, and know that the gamble is a martingale, they exhibit probability weighting to compensate for probability leakage arising from the their stopped behavioral process.

Available Versions of this Item

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.