Until the Bitter End: On Prospect Theory in a Dynamic Context

Until the Bitter End: On Prospect Theory in a Dynamic Context

We provide a result on prospect theory decision makers who are naïve about the time inconsistency induced by probability weighting. If a market offers a sufficiently rich set of investment strategies, investors postpone their trading decisions indefinitely due to a strong preference for skewness. We...

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Veröffentlicht in:The American economic review 2015-04, Vol.105 (4), p.1618-1633
Hauptverfasser: Ebert, Sebastian, Strack, Philipp
Format: Artikel
Sprache:eng
Schlagworte:
Behavior
Casinos
Decision making
Economic models
Economic theory
Economics
Expected utility
Gambling
Game theory
Investment strategies
Investors
Loss aversion
Lotteries
Preferences
Probability
Prospect theory
Random variables
Risk aversion
Securities trading
Shorter Papers
Skewed distribution
Skewness
Studies
Term weighting
Weighting functions
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Beschreibung
Zusammenfassung:We provide a result on prospect theory decision makers who are naïve about the time inconsistency induced by probability weighting. If a market offers a sufficiently rich set of investment strategies, investors postpone their trading decisions indefinitely due to a strong preference for skewness. We conclude that probability weighting in combination with naïveté leads to unrealistic predictions for a wide range of dynamic setups.
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.20130896