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  3. American Economic Review
  4. April 2015
  5. Until the Bitter End: On Prospect Theory in a Dynamic Context

Until the Bitter End: On Prospect Theory in a Dynamic Context

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Abstract

We provide a result on prospect theory decision makers who are naïve about the time inconsistency induced by probability weighting. If a market offers a sufficiently rich set of investment strategies, investors postpone their trading decisions indefinitely due to a strong preference for skewness. We conclude that probability weighting in combination with naïveté leads to unrealistic predictions for a wide range of dynamic setups. (JEL D81, G02, G11)

Citation

Ebert, Sebastian, and Philipp Strack. 2015. "Until the Bitter End: On Prospect Theory in a Dynamic Context." American Economic Review, 105 (4): 1618-33. DOI: 10.1257/aer.20130896

Additional Materials

JEL Classification

  • D81 Criteria for Decision-Making under Risk and Uncertainty
  • G02 Behavioral Finance: Underlying Principles
  • G11 Portfolio Choice; Investment Decisions