Journal of Risk and Uncertainty

, Volume 7, Issue 2, pp 147-175

First online:

An axiomatization of cumulative prospect theory

  • Peter WakkerAffiliated withMedical Decision Making Unit, University of Leiden
  • , Amos TverskyAffiliated withDepartment of Psychology, Stanford University

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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 theory rank-dependence sign-dependence comonotonicity risk aversion diminishing marginal utility