Stochastic Dominance and Prospect Dominance with Subjective Weighting Functions.

Laboratory experiments with and without real money repeatedly reveal that even if all subjects observe the same pair of cumulative distributions F and G, they act as if they were other cumulative probability functions F* and G* different for different investors. Namely, the subjects assign (subjective) weights to the various probabilities. In their breakthrough article Kahneman and Tversky (1979) suggest that in making decisions under uncertainty, the subjects apply a monotonic transformation pi(p) where p are the probabilities, and investors make decisions by comparing pi(p) corresponding to the two distributions under consideration rather than by comparing the true probabilities, p, themselves. Copyright 1998 by Kluwer Academic Publishers