Prospect Theory for Continuous Distributions

Posted: 10 Oct 2007 Last revised: 30 Apr 2008

See all articles by Marc Oliver Rieger

Marc Oliver Rieger

University of Trier

Mei Wang

WHU - Otto Beisheim School of Management

Abstract

We extend the original form of Prospect Theory by Kahneman and Tversky from finite lotteries to arbitrary probability distributions, thus paving the way for applications in economics and finance. Moreover, we suggest a method how to incorporate a crucial step of the "editing phase" into Prospect Theory and to remove in this way the discontinuity of the original model.

Keywords: Prospect Theory, Cumulative Prospect Theory, continuity, probability weighting, first-order stochastic dominance

JEL Classification: D81

Suggested Citation

Rieger, Marc Oliver and Wang, Mei, Prospect Theory for Continuous Distributions. Swiss Finance Institute Research Paper No. 07-30, Journal of Risk and Uncertainty, Vol. 36, No. 1, 2008, Available at SSRN: https://ssrn.com/abstract=1020042

Marc Oliver Rieger (Contact Author)

University of Trier ( email )

15, Universitaetsring
Trier, 54286
Germany

HOME PAGE: http://www.banking-finance.uni-trier.de

Mei Wang

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallender, 56179
Germany

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