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Title:Alternation Bias and the Parameterization of Cumulative Prospect Theory PDF Logo
Authors:Kaivanto, Kim
Issue Date:2008
Citation:[Editor:] Abdellaoui, Mohammed [Editor:] Hey, John D. [Title:] Advances in Decision Making Under Risk and Uncertainty [Series:] Theory and Decision Library C [No.:] 42 [Publisher:] Springer-Verlag [Place:] Berlin, Heidelberg [Year:] 2008 [Pages:] 91-107
Abstract:Two recently published studies argue that conventional parameterizations of cumulative prospect theory (CPT) fail to resolve the St. Petersburg Paradox. Yet as a descriptive theory CPT is not intended to account for the local representativeness effect, which is known to induce 'alternation bias' on binary iid sequences such as those generated by coin tossing in St. Petersburg gambles. Once alternation bias is controlled for, conventional parameterizations of CPT yield finite certainty equivalents for the St. Petersburg gamble, negating the suggested need for reparameterization. Moreover, the associated willingness to pay estimates fall within the generally accepted empirical range.
Subjects:St. Petersburg Paradox
Cumulative Prospect Theory
Local Representativeness Effect
Alternation Bias
Law of Small Numbers
JEL:D81
D84
Additional Information:Chapter 6
Document Type:Book Part
Appears in Collections:Articles / Aufsätze, EconStor Direct

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