Kontek, Krzysztof (2009): Absolute vs. Relative Notion of Wealth Changes.
This is the latest version of this item.
Download (166kB) | Preview
This paper discusses solutions derived from lottery experiments using two alternative assumptions: that people perceive wealth changes as absolute amounts of money; and that people consider wealth changes as a proportion of some reference value dependant on the context of the problem under consideration. The former assumption leads to the design of Prospect Theory, the latter - to a solution closely resembling the utility function hypothesized by Markowitz (1952B). This paper presents several crucial arguments for the latter approach. That essentially all financial theories consider “returns” expressed in relative terms, rather than “gains” and “losses” expressed as monetary amounts, is one of them. This provides arguments for rejecting the Prospect Theory paradigm.
|Item Type:||MPRA Paper|
|Original Title:||Absolute vs. Relative Notion of Wealth Changes|
|Keywords:||Prospect / Cumulative Prospect Theory, Probability Weighting Function, Markowitz Hypothesis, Weber’s Law|
|Subjects:||D - Microeconomics > D0 - General > D03 - Behavioral Economics; Underlying Principles
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D87 - Neuroeconomics
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
|Depositing User:||Krzysztof Kontek|
|Date Deposited:||02. Sep 2011 14:06|
|Last Modified:||15. Feb 2013 22:37|
Baltussen, G., Post, T., Van den Assem, M. J., (2008). Risky Choice and the Relative Size of Stakes. SSRN Working Paper http://ssrn.com/abstract=989242 .
Kahneman, D., Tversky, A., (1979). Prospect theory: An analysis of decisions under risk. Econometrica, 47, 313-327.
Kahneman, D., Tversky, A., (1984). Choices, Values, and Frames. American Psychologist, 39(4), 341-350.
Kontek, K., (2011). On Mental Transformations. Forthcoming in the Journal of Neuroscience, Psy-chology, and Economics.
Markowitz, H. M., (1952A). Portfolio Selection. Journal of Finance, 7, 77-91.
Markowitz, H. M., (1952B). The Utility of Wealth. Journal of Political Economy, 60, 151-158.
Thaler, R. H., (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior and Organization, 1, 39-60.
Thaler, R. H., (1999). Mental Accounting Matters. Journal of Behavioral Decision Making, 12, 183 - 206.
Tversky, A., Kahneman, D., (1992). Advances in Prospect Theory: Cumulative Representation of Uncertainty. Journal of Risk and Uncertainty, Springer, 5(4), 297-323.
Weber’s law. (2009). In Encyclopædia Britannica. Retrieved August 11, 2009, from Encyclopædia Britannica Online: http://www.britannica.com/EBchecked/topic/638610/Webers-law
Available Versions of this Item
Absolute vs. Relative Notion of Wealth Changes. (deposited 16. Sep 2009 19:41)
Absolute vs. Relative Notion of Wealth Changes. (deposited 28. Mar 2011 23:39)
- Absolute vs. Relative Notion of Wealth Changes. (deposited 02. Sep 2011 14:06) [Currently Displayed]
- Absolute vs. Relative Notion of Wealth Changes. (deposited 28. Mar 2011 23:39)