Stochastic dominance and cumulative prospect theory

• 成果类型: Article
• 署名作者: Baucells, Manel; Heukamp, Franz H.
• 署名单位: University of Navarra; IESE Business School
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.1060.0537
• 发表日期: 2006
• 页码: 1409-1423
• 关键词: second-order stochastic dominance; cumulative prospect theory; value function; Probability weighting function

摘要

We generalize and extend the second-order stochastic dominance condition for expected utility to cumulative prospect theory. The new definitions include preferences represented by S-shaped value functions, inverse S-shaped probability weighting functions, and loss aversion. The stochastic dominance conditions supply a framework to test different features of cumulative prospect theory. In the experimental part of the 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 (2002) in favor of the S-shaped form. In addition, we find generally supporting evidence for loss aversion. Violations of loss aversion can be explained by subjects using the overall probability of winning as a heuristic.