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Title:Third-generation prospect theory PDF Logo
Authors:Schmidt, Ulrich
Starmer, Chris
Sugden, Robert
Issue Date:2008
Citation:[Journal:] Journal of Risk and Uncertainty [ISSN:] 0895-5646 [Volume:] 36 [Issue:] 3 [Pages:] 203-223
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.
Subjects:Prospect theory
Preference reversal
Reference dependence
JEL:D81
Persistent Identifier of the first edition:doi:10.1007/s11166-008-9040-2
Document Type:Article
Appears in Collections:Publikationen von Forscherinnen und Forschern des IfW

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