Talk:Prospect theory

stuff removed

Is there a reason this article has been removed? Dieter Simon 23:30 12 Jun 2003 (UTC)

I've removed this dead link

• Cornell University Lecture Notes on Behavorial Economics and Prospect Theory

we need something good to replace it TitaniumDreads 14:15, 9 Jun 2005 (UTC)

Examples

The table is a bit confusing: it would help if the settlement was specified instead of just "favorable" or "unfavorable". Now it looks as if one would prefer a 5% chance of winning money over a 95% chance of winning the same amount. I assume what is meant is something like:

• 95% chance to win $10,000. Fear of disappointment. RISK AVERSE. Accept $9,000 settlement
• 5% chance to win $10,000. Hope of large gain. RISK SEEKING. Reject $1,000 settlement
• 95% chance to lose $10,000. Hope to avoid loss. RISK SEEKING. Reject paying $9,000 settlement
• 5% chance to lose $10,000. Fear of large loss. RISK AVERSE. Accept paying $1,000 settlement Ssscienccce (talk) 06:35, 23 March 2014 (UTC)

I have to say that the example section is a pretty good illustration of how you can take a fairly simple concept and turn it into text even people who understand the theory will be confused by. The point in an example is to explain it to people who don't understand the theory (it's actually a very simple theory) not to throw excessive amounts of terminology at people. 82.26.17.69 (talk) 22:55, 4 January 2016 (UTC)

Dr. Schudy's comment on this article

Dr. Schudy has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

Comment on Figure

Just a tiny detail: In the figure it seems as if the value function is not convex in the loss domain (lower left part seems to become steeper again.

Comment on "Some behaviors observed in economics, like the disposition effect or the reversing of risk aversion/risk seeking in case of gains or losses (termed the reflection effect), can also be explained by referring to the prospect theory."

There is a strong debate under which conditions prospect theory can explain the disposition effect (see e.g. Barberis and Xiong, 2009; Henderson, 2012; Hens and Vlcek, 2011; Kaustia, 2010 for a discussion). Further, recent experimental evidence suggests that the disposition effect cannot fully be explained by prospect theory but rather by a combination of time-insconsistent behavior with some utility models which can generate a reluctance to realize assets trading at a loss (such as prospect theory or realization utility) (see Fischbacher, Hoffmann and Schudy, 2015).

Barberis, N., Xiong, W., 2009. What Drives the Disposition Effect? An Analysis of a Long‐Standing Preference‐Based Explanation. The Journal of Finance, 64(2), 751-784.

Fischbacher, U., Hoffmann, G. and Schudy, S., 2015. The causal effect of stop-loss and take-gain orders on the disposition effect. TWI Research Paper available at: http://www.twi-kreuzlingen.ch/uploads/tx_cal/media/TWI-RPS-089-Fischbacher-Hoffmann-Schudy.pdf

Henderson, V., 2012. Prospect theory, liquidation, and the disposition effect. Management Science, 58(2), 445-460.

Hens, T., Vlcek, M., 2011. Does prospect theory explain the disposition effect? Journal of Behavioral Finance, 12(3), 141-157.

Kaustia, M., 2010. Prospect theory and the disposition effect. Journal of Financial and Quantitative Analysis, 45(03), 791-812.

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. Schudy has published scholarly research which seems to be relevant to this Wikipedia article:

• Reference : Urs Fischbacher & Gerson Hoffmann & Simeon Schudy, 2014. "The causal effect of stop-loss and take-gain orders on the disposition effect," TWI Research Paper Series 89, Thurgauer Wirtschaftsinstitut, Universitat Konstanz.

ExpertIdeasBot (talk) 18:50, 27 June 2016 (UTC)

Dr. Krawczyk's comment on this article

Dr. Krawczyk has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

The term "prospect theory" is often applied to the cumulative version or both. Given that this entry is on the classic version only, this should be emphasised early on.

"in its simplest form" is unclear. The picture is misleading, because the value function is smooth at 0, whereas loss aversion would mean that the slope is greater for losses than gains close to zero -- a point of discontinuity. "This differs from expected utility theory, in which a rational agent is indifferent to the reference point." -- this sentence does not make much sense, for more than one reason. There is no such notion as "reference point" in the EUT. An agent is "indifferent to the reference point" (if I understand this strange expression correctly) also under prospect theory. "the first equation" -- it is not clear which one is meant here. "υ()" is not defined. Shouldn't it be v()? "The value function is thus defined on deviations from the reference point, generally concave for gains and commonly convex for losses and steeper for losses than for gains." -- why this is discussed at this point? It is mentioned when the value function is introduced and that is enough. "The comparison between ... If we set the frame..." -- it is not clear what these two paragraphs are supposed to illustrate if predictions can be the same. "The digital age has brought the implementation of prospect theory in software" -- not sure what the authors mean.

"the excess returns puzzle and long swings/PPP puzzle of exchange rates through the endogenous prospect theory of Imperfect Knowledge Economics, " -- is this a "situation"??

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Krawczyk has expertise on the topic of this article, since he has published relevant scholarly research:

• Reference : Micha Krawczyk, 2014. "Probability weighting in different domains: the role of stakes, fungibility, and affect," Working Papers 2014-15, Faculty of Economic Sciences, University of Warsaw.

ExpertIdeasBot (talk) 00:32, 30 September 2016 (UTC)

Dr. Dhami's comment on this article

Dr. Dhami has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

This article does not even remotely do any justice to prospect theory. This is a very incomplete and limited account of prospect theory. It will serve more to confuse than enlighten. The original articles by Kahneman and Tversky (in the further reading section of the article) are very enlightening. For a clear and comprehensive treatment of prospect theory, see:

Sanjit Dhami (2016) Foundations of Behavioral Economic Analysis. Oxford University Press. To be published by mid October 2016. Here is another excellent must-read source to gain understanding of prospect theory: Kahneman, D., and Tversky, A. (2000). Choices, Values and Frames. Cambridge: Cambridge University Press.

Here are some comments on the individual sections:

1. Section titled "Model": A variety of technical terms are introduced in describing the editing phase in prospect theory--these terms will be unknown to most readers. The following sentence is incorrect: "This differs from expected utility theory, in which a rational agent is indifferent to the reference point." 2. Section titled "Example": The section jumps directly into "fourfold classification of risk". The previous section titled "Model" refers to the 1979 version of the model (better called as original prospect theory) and the fourfold classification refers to the 1992 version of the model (based on Tversky and Kahneman, JRU, 1992: cited in further reading). The 1992 version is known as cumulative prospect theory (and typically just called prospect theory). There is no way someone can understand this material unless it clarified that under prospect theory, risk attitudes are jointly determined by the shapes of the probability weighting function and the shape of the utility function. 3. Section titled "Applications": This is disappointing. It should account for 40% of the article. The applications are very rich, varied, and cover the entire field of economics. All this is covered in: Sanjit Dhami (2016) Foundations of Behavioral Economic Analysis. Oxford University Press. To be published by mid October 2016.

Kahneman, D., and Tversky, A. (2000). Choices, Values and Frames. Cambridge: Cambridge University Press.

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Dhami has expertise on the topic of this article, since he has published relevant scholarly research:

• Reference 1: Sanjit Dhami & Ali al-Nowaihi, 2010. "The Behavioral Economics of Crime and Punishment," Discussion Papers in Economics 10/14, Department of Economics, University of Leicester, revised Jul 2010.

• Reference 2: Ali al-Nowaihi & Sanjit Dhami, 2008. "A value function that explains the magnitude and sign effects," Discussion Papers in Economics 08/31, Department of Economics, University of Leicester.

ExpertIdeasBot (talk) 02:05, 2 October 2016 (UTC)