TY - JOUR

T1 - A Simple Preference-Foundation of Cumulative Prospect Theory with Power Utility

AU - Wakker, P.P.

AU - Zank, H.

PY - 2002/1/1

Y1 - 2002/1/1

N2 - Most empirical studies of rank-dependent utility and cumulative prospect theory have assumed power utility functions, both for gains and for losses. As it turns out, a remarkably simple preference foundation is possible for such models: Tail independence (a weakening of comonotonic independence which underlies all rank-dependent models) together with constant proportional risk aversion suffice, in the presence of common assumptions (weak ordering, continuity, and first stochastic dominance), to imply these models. Thus, sign dependence, the different treatment of gains and losses, and the separation of decision weights and utility are obtained free of charge.

AB - Most empirical studies of rank-dependent utility and cumulative prospect theory have assumed power utility functions, both for gains and for losses. As it turns out, a remarkably simple preference foundation is possible for such models: Tail independence (a weakening of comonotonic independence which underlies all rank-dependent models) together with constant proportional risk aversion suffice, in the presence of common assumptions (weak ordering, continuity, and first stochastic dominance), to imply these models. Thus, sign dependence, the different treatment of gains and losses, and the separation of decision weights and utility are obtained free of charge.

U2 - 10.1016/S0014-2921(01)00141-6

DO - 10.1016/S0014-2921(01)00141-6

M3 - Article

SN - 0014-2921

VL - 46

SP - 1253

EP - 1271

JO - European Economic Review

JF - European Economic Review

ER -