Parameter interactions in cumulative prospect theory in relation to probability weighting

Elzbieta Babula and Juhyun Park ()
Additional contact information
Juhyun Park: LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - ENSIIE - Ecole Nationale Supérieure d'Informatique pour l'Industrie et l'Entreprise - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, ENSIIE - Ecole Nationale Supérieure d'Informatique pour l'Industrie et l'Entreprise

Post-Print from HAL

Abstract: Tversky and Kahneman's cumulative prospect theory assumes symmetric probability cumulation with regard to the reference point in decision weights. Theoretically, this model should be fixed despite a change in the direction of probability cumulation. We investigate this phenomenon by proposing an alternative model with one-direction probability cumulation. By doing so, we create a reference model that allows us to verify the parameter interactions in cumulative prospect theory specifications. We apply the simultaneous parametric fitting of utility and weighting functions using binary choice data from our own incentivized choice experiment (N = 70). We consider two parametric forms of probability weighting functions, namely, the one-parameter Tversky–Kahneman and two-parameter Prelec functions. We find that the Prelec function is sufficiently flexible to make these two models equivalent, thereby preserving the stability of the utility parameters. We also observe parameter interactions in the other specifications, especially with the Tversky–Kahneman weighting function.

Keywords: parameter interactions; rank-dependent utility; decision weights; cumulative prospect theory (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-dcm and nep-mac
Note: View the original document on HAL open archive server: https://hal.science/hal-05231129v1
References: Add references at CitEc
Citations:

Published in Economics & Sociology, 2025, 18 (2), pp.91-118. ⟨10.14254/2071-789X.2025/18-2/6⟩

Downloads: (external link)
https://hal.science/hal-05231129v1/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05231129

DOI: 10.14254/2071-789X.2025/18-2/6

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().