Violations of Cpt in Mixed Gambles
Management Science, Vol. 52, No. 8, pp. 1288-1290
17 Pages Posted: 27 Feb 2004
This study conducts a classroom experiment and an online experiment to examine individual decision-making under risk. Like Levy and Levy (2002), the experiment uses pairs of mixed gambles with moderate probabilities to avoid the framing effect and certainty affect that may affect non-mixed gambles with extreme probabilities. Also, we use Stochastic Dominance criteria to avoid parametric specification of decision-maker preferences. Explicitly accounting for the Wakker (2003) comment, we find several serious violations of Cumulative Prospect Theory (CPT). In fact, in a head-to-head competition between Second-order Stochastic Dominance (SSD) and CPT, most individuals choose the SSD alternative.
Keywords: Cumulative prospect theory, expected utility, mixed gambles, probability weighting, stochastic dominance
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