Prospect Theory for Continuous Distributions
Posted: 10 Oct 2007 Last revised: 30 Apr 2008
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
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