Cadogan, Godfrey (2010): Commutative Prospect Theory and Stopped Behavioral Processes for Fair Gambles.
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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 DudleyTalagrand 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 spacetime 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 NeumanMorgenstern 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.
Item Type:  MPRA Paper 

Original Title:  Commutative Prospect Theory and Stopped Behavioral Processes for Fair Gambles 
Language:  English 
Keywords:  commutative prospect theory; homotopy; stopping time; behavioral stochastic process 
Subjects:  D  Microeconomics > D0  General > D03  Behavioral Economics; Underlying Principles D  Microeconomics > D8  Information, Knowledge, and Uncertainty > D81  Criteria for DecisionMaking under Risk and Uncertainty D  Microeconomics > D7  Analysis of Collective DecisionMaking > D70  General C  Mathematical and Quantitative Methods > C0  General C  Mathematical and Quantitative Methods > C0  General > C02  Mathematical Methods 
Item ID:  22342 
Depositing User:  godfrey cadogan 
Date Deposited:  28. Apr 2010 00:11 
Last Modified:  22. Feb 2013 23:52 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/22342 
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