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An Axiomatization of Cumulative Prospect Theory

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  • Wakker, Peter
  • Tversky, Amos
Abstract
This paper presents a method for axiomatizing a variety of models for decision making under uncertainty, including Expected Utility and Cumulative Prospect Theory. This method identifies, for each model, the situations that permit consistent inferences about the ordering of value differences. Examples of rank-dependent and sign-dependent preference patterns are used to motivate the models and the "tradeoff consistency" axioms that characterize them. The major properties of the value function in Cumulative Prospect Theory--diminishing sensitivity and loss aversion--are contrasted with the principle of diminishing marginal utility that is commonly assumed in Expected Utility. Copyright 1993 by Kluwer Academic Publishers

Suggested Citation

  • Wakker, Peter & Tversky, Amos, 1993. "An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 147-175, October.
    • Handle: RePEc:kap:jrisku:v:7:y:1993:i:2:p:147-75
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