We provide a preference foundation for decision under risk resulting in a model where probability weighting is linear as long as the corresponding probabilities are not extreme (i.e., 0 or 1). This way, most of the elegance and mathematical tractability of expected utility is maintained and also...

Empirical research has shown that people tend to overweight small probabilities and underweight large probabilities when valuing risky prospects, but little is known about factors influencing the shape of the probability weighting curve. Based on a laboratory experiment with monetary incentives,...

This paper extends the model with narrow framing suggested by Barberis and Huang (2009) to also account for probability weighting and a convex-concave value function in the specification of cumulative prospect theory preferences on narrowly framed assets. We show that probability weighting is...

We investigate a basic premise of prospect theory: that the valuation of gains and losses is separable. In prospect theory, gain-loss separability implies that a mixed gamble is valued by summing the valuations of the gain and loss portions of that gamble. Two experimental studies demonstrate a...

This paper provides preference foundations for parametric weighting functions under rankdependent utility. This is achieved by decomposing the independence axiom of expected utility into separate meaningful properties. These conditions allow us to characterize rank-dependent utility with power...

We find that in cumulative prospect theory (CPT) with a concave value function in gains, a lottery with finite expected value may have infinite subjective value. This problem does not occur in expected utility theory. The paradox occurs in particular in the setting and the parameter regime...

Women are commonly stereotyped as more risk averse than men in financial decision making. In this paper we examine whether this stereotype reflects gender differences in actual risk-taking behavior by means of a laboratory experiment with monetary incentives. Gender differences in risk taking...

When valuing risky prospects, people typically overweight small probabilities and underweight medium and large probabilities, but there is vast heterogeneity in individual behavior. We explore the relationship between person-specific probability weights, estimated from investment decisions in a...