Third-generation prospect theory

Schmidt, Ulrich; Starmer, Chris; Sugden, Robert

doi:10.1007/s11166-008-9040-2

Cited by 218 publications

(144 citation statements)

References 44 publications

(34 reference statements)

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“…A WTA-WTP difference has been observed in many studies for risky prospects and can been explained by configural weighting (Birnbaum & Stegner 1979;Birnbaum & Beeghley, 1997) or loss aversion (Birnbaum & Zimmermann, 1998;Sugden, 2003;Schmidt, Starmer, & Sugden, 2008). There exist, however, only few studies on the pricing of ambiguous prospects.…”

Section: Pricing Uncertain Prospects: the Effect Of The Perspectivementioning

confidence: 99%

Pricing Risk and Ambiguity: The Effect of Perspective Taking

Trautmann

Schmidt

2012

Quarterly Journal of Experimental Psychology

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In the valuation of uncertain prospects, a difference is often observed between selling and buying perspectives. This paper distinguishes between risk (known probabilities) and ambiguity (unknown probabilities) in decisions under uncertainty and shows that the valuation disparity increases under ambiguity compared to risk. It is found that both the comparative versus noncomparative evaluation of risky and ambiguous prospects and the uniqueness of the valuation perspective (either seller or buyer) moderate this increase in the disparity under ambiguity. The finding is consistent with recent theoretical accounts of pricing under uncertainty. We discuss implications for market behaviour and for the ambiguity paradigm as a research tool.

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Section: Pricing Uncertain Prospects: the Effect Of The Perspectivementioning

confidence: 99%

Pricing Risk and Ambiguity: The Effect of Perspective Taking

Trautmann

Schmidt

2012

Quarterly Journal of Experimental Psychology

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“…In alternative models, attention has been paid to endogenous reference points that are choice-dependent (e.g., Gul 1991;Sugden 2003;Delquié and Cillo 2006;Bleichrodt 2007;Schmidt et al 2008). Such multiple reference points are explicitly allowed for in the referencedependent theories of Munro and Sugden (2003) and Sagi (2006) where, motivated by the status quo effect, adjustments of preferences to new reference points are permitted.…”

Section: Models With Reference Pointsmentioning

confidence: 99%

A revealed reference point for prospect theory

Werner

Zank

2018

Econ Theory

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Without an instrument to identify the reference point, prospect theory includes a degree of freedom that makes the model difficult to falsify. To address this issue, we propose a foundation for prospect theory that advances existing approaches with three innovations. First, the reference point is not known a priori; if preferences are reference-dependent, the reference point is revealed from behavior. Second, the key preference axiom is formulated as a consistency property for attitudes toward probabilities; it entails both a revealed preference test for reference-dependence and a tool suitable for empirical measurement. Third, minimal assumptions are imposed for outcomes, thereby extending the model to general settings. By incorporating these three features we deliver general foundations for prospect theory that show how reference points can be identified and how the model can be falsified.

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“…On the other hand, when preferences are defined over wealth changes, it turns out that traditional preference reversal is possible. Schmidt et al (2008) shows that preference reversal may occur in third generation prospect theory. They calibrate for which values of parameters a quite general (and yet parametrized) version of prospect theory is compatible with preference reversal.…”

Section: Preference Reversal For Preferences Over Wealth Changesmentioning

confidence: 99%

“…Hence it would be impossible to define willingness to accept in this formulation. Schmidt et al (2008) proposed a so called "third-generation prospect theory" in which the reference point is allowed to be random. They defined willingness to accept and willingness to pay essentially as in Eqs.…”

Section: Proposition 51 Suppose That U(x) < −U(−x) For All X > 0 Thmentioning

confidence: 99%

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Buying and selling price for risky lotteries and expected utility theory with gambling wealth

Lewandowski

2014

J Risk Uncertain

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I analyze two expected utility models which abandon the consequentialist assumption of terminal wealth positions. In the expected utility of gambling wealth model, in which initial wealth is allowed to be small, I show that a large WTA/WTP gap is possible and the (Rabin in Econometrica, 68(5), [1281][1282][1283][1284][1285][1286][1287][1288][1289][1290][1291][1292] 2000) paradox may be resolved. Within the same model the classical preference reversal which allows arbitrage is not possible, whereas preference reversal (involving buying prices in place of selling prices), which does not allow arbitrage, is possible. In the expected utility of wealth changes model, in which there is no initial wealth, I show that both a WTA/WTP gap as well as the classical preference reversal are possible due to loss aversion, both in its general as well as some specific forms.Keywords Expected utility · Narrow framing · Rabin (2000) paradox · Preference reversal · WTA/WTP disparity · Buying and selling price for a lotteryWillingness to accept (WTA) or selling price for a lottery is a minimal sure amount of money which a person is willing to accept to forego the right to play the lottery. Willingness to pay (WTP) or buying price for a lottery, on the other hand, is a maximal sure amount of money which a person is willing to pay in order to get the right to play the lottery. The disparity between willingness to pay and willingness to accept is a well-known phenomenon that arises in experimental settings. There is a large body of evidence starting with Knetsch and Sinden (1984) and Thaler (1980) that WTA is much higher than WTP for many types of goods. Horowitz and McConnell (2002)

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Third-generation prospect theory

Cited by 218 publications

References 44 publications

Pricing Risk and Ambiguity: The Effect of Perspective Taking

Pricing Risk and Ambiguity: The Effect of Perspective Taking

A revealed reference point for prospect theory

Buying and selling price for risky lotteries and expected utility theory with gambling wealth

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