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305
Advances in Prospect Theory: Cumulative Representation of Uncertainty
 JOURNAL OF RISK AND UNCERTAINTY, 5:297323 (1992)
, 1992
"... We develop a new version of prospect theory that employs cumulative rather than separable decision weights and extends the theory in several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows differ ..."
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Cited by 1717 (17 self)
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We develop a new version of prospect theory that employs cumulative rather than separable decision weights and extends the theory in several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses. Two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment confirm a distinctive fourfold pattern of risk attitudes: risk aversion for gains and risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low probability.
Familiarity Breeds Investment
 Review of Financial Studies, XIV
"... and Jason Zweig for useful conversations and to Lipper Analytical Services for data on Texas municipal bond funds. Familiarity Breeds Investment by ..."
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Cited by 331 (10 self)
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and Jason Zweig for useful conversations and to Lipper Analytical Services for data on Texas municipal bond funds. Familiarity Breeds Investment by
Investor diversification and international equity markets"
 American Economic Review,
, 1991
"... ..."
Curvature of the probability weighting function
 Management Science
, 1996
"... Empirical studies have shown that decision makers do not usually treat probabilities linearly. Instead, people tend to overweight small probabilities and underweight large probabilities. One way to model such distortions in decision making under risk is through a probability weighting function. We ..."
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Cited by 290 (5 self)
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Empirical studies have shown that decision makers do not usually treat probabilities linearly. Instead, people tend to overweight small probabilities and underweight large probabilities. One way to model such distortions in decision making under risk is through a probability weighting function. We present a nonparametric estimation procedure for assessing the probability weighting function and value function at the level of the individual subject. The evidence in the domain of gains supports a twoparameter weighting function, where each parameter is given a psychological interpretation: one parameter measures how the decision maker discriminates probabilities, and the other parameter measures how attractive the decision maker views gambling. These findings are consistent with a growing body of empirical and theoretical work attempting to establish a psychological rationale for the probability weighting function. ª 1999 Academic Press The perception of probability has a psychophysics all its own. If men have a 2 % chance of contracting a particular disease and women have a 1% chance, we perceive the risk for men as twice the risk for women. However, the same difference of 1 % appears less dramatic when the chance of con
The determinants of crossborder equity flows
 Journal of International Economics
, 2005
"... We explore a new panel data set on bilateral gross crossborder equity flows between 14 countries, 198996. We show that a “gravity ” model explains international transactions in financial assets at least as well as goods trade transactions. Gross transaction flows depend on market size in both sour ..."
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Cited by 267 (9 self)
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We explore a new panel data set on bilateral gross crossborder equity flows between 14 countries, 198996. We show that a “gravity ” model explains international transactions in financial assets at least as well as goods trade transactions. Gross transaction flows depend on market size in both source and destination country as well as trading costs, in which both information and the transaction technology play a role. Distance proxies some information costs, and other variables explicitly represent information transmission, an information asymmetry between domestic and foreign investors, and the efficiency of transactions. The remarkably good results have strong implications for theories of asset trade. We find that the geography of information is the main determinant of the pattern of international transactions, while there is weak support in our data for the diversification motive, once we control for the informational friction. We strengthen our conclusions by investigating in another data set the ability of our information variables to explain transactions in classes of assets with different informational content (corporate bonds, equities and government bonds). Finally, we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings.
The weighting of evidence and the determinants of confidence
 Cognitive Psychology
, 1992
"... The pattern of overconfidence and underconfidence observed in studies of intuitive judgment is explained by the hypothesis that people focus on the strength or extremeness of the available evidence (e.g., the warmth of a letter or the size of an effect) with insufficient regard for its weight or cr ..."
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Cited by 234 (4 self)
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The pattern of overconfidence and underconfidence observed in studies of intuitive judgment is explained by the hypothesis that people focus on the strength or extremeness of the available evidence (e.g., the warmth of a letter or the size of an effect) with insufficient regard for its weight or credence (e.g., the credibility of the writer or the size of the sample). This mode of judgment yields overconfidence when strength is high and weight is low, and underconfidence when strength is low and weight is high. We first demonstrate this phenomenon in a chance setup where strength is defined by sample proportion and weight is defined by sample size, and then extend the analysis to more complex evidential problems, including general knowledge questions and predicting the behavior of self and of others. We propose that people’s confidence is determined by the balance of arguments for and against the competing hypotheses, with insufficient regard for the weight of the evidence. We show that this account can explain the effect of item difficulty on overconfidence, and we relate the observed discrepancy between confidence judgments and frequency estimates to the illusion of validity.
Weighing Risk and Uncertainty
, 1995
"... Decision theory distinguishes between risky prospects, where the probabilities associated with the possible outcomes are assumed to be known, and uncertain prospects, where these probabilities are not assumed to be known. Studies of choice between risky prospects have suggested a nonlinear transform ..."
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Cited by 187 (10 self)
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Decision theory distinguishes between risky prospects, where the probabilities associated with the possible outcomes are assumed to be known, and uncertain prospects, where these probabilities are not assumed to be known. Studies of choice between risky prospects have suggested a nonlinear transformation of the probability scale that overweights low probabilities and underweights moderate and high probabilities. The present article extends this notion from risk to uncertainty by invoking the principle of bounded subadditivity: An event has greater impact when it turns impossibility into possibility, or possibility into certainty, than when it merely makes a possibility more or less likely. A series of studies provides support for this principle in decision under both risk and uncertainty and shows that people are less sensitive to uncertainty than to risk. Finally, the article discusses the relationship between probability judgments and decision weights and distinguishes relative sensitivity from ambiguity aversion.
Portfolio Selection with Parameter and Model Uncertainty: A MultiPrior Approach
, 2006
"... We develop a model for an investor with multiple priors and aversion to ambiguity. We characterize the multiple priors by a "confidence interval" around the estimated expected returns and we model ambiguity aversion via a minimization over the priors. Our model has several attractive featu ..."
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Cited by 114 (4 self)
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We develop a model for an investor with multiple priors and aversion to ambiguity. We characterize the multiple priors by a "confidence interval" around the estimated expected returns and we model ambiguity aversion via a minimization over the priors. Our model has several attractive features: (1) it has a solid axiomatic foundation; (2) it is flexible enough to allow for different degrees of uncertainty about expected returns for various subsets of assets and also about the returngenerating model; and (3) it delivers closedform expressions for the optimal portfolio. Our empirical analysis suggests that, compared with portfolios from classical and Bayesian models, ambiguityaverse portfolios are more stable over time and deliver a higher outof sample Sharpe ratio.
Risk attitudes and decision weights
 Econometrica
, 1995
"... Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at ..."
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Cited by 90 (7 self)
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