Stochastic Dominance and Cumulative Prospect Theory
- Autores: Manel Baucells, Franz H. Heukamp
- Localización: Documentos de trabajo ( Fundación BBVA ), Nº. 2, 2007
- Idioma: español
- Enlaces
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Resumen
We generalize and extend the second order stochastic dominance condition available for Expected Utility to Cumulative Prospect Theory.
The new definitions include, among others, preferences represented by S-shaped value and inverse S-shaped probability weighting functions.
The stochastic dominance conditions supply a framework to test different features of Cumulative Prospect Theory. In the experimental part of the working paper we offer a test of several joint hypotheses on the value function and the probability weighting function. Assuming empirically relevant weighting functions, we can reject the inverse S-shaped value function recently advocated by Levy and Levy (2002a), in favor of the S-shaped form. In addition, we find generally supporting evidence for loss aversion. Violations of loss aversion can be linked to subjects using the overall probability of winning as heuristic.
