Journal of Risk and Uncertainty

, Volume 7, Issue 2, pp 147–175

An axiomatization of cumulative prospect theory

Authors

  • Peter Wakker
    • Medical Decision Making UnitUniversity of Leiden
  • Amos Tversky
    • Department of PsychologyStanford University
Article

DOI: 10.1007/BF01065812

Cite this article as:
Wakker, P. & Tversky, A. J Risk Uncertainty (1993) 7: 147. doi:10.1007/BF01065812

Abstract

This paper presents a method for axiomatizing a variety of models for decision making under uncertainty, including Expected Utility and Cumulative Prospect Theory. This method identifies, for each model, the situations that permit consistent inferences about the ordering of value differences. Examples of rankdependent and sign-dependent preference patterns are used to motivate the models and the “tradeoff consistency” axioms that characterize them. The major properties of the value function in Cumulative Prospect Theory—diminishing sensitivity and loss aversion—are contrasted with the principle of diminishing marginal utility that is commonly assumed in Expected Utility.

Key words

prospect theoryrank-dependencesign-dependencecomonotonicityrisk aversiondiminishing marginal utility

Copyright information

© Kluwer Academic Publishers 1993