On Prospect Theory in a Dynamic Context

OMI Seminar Series

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. Finally, I discuss recent work on the topic that invokes different assumptions on the dynamic modeling of prospect theory.


Sebastian Ebert (Tilburg University)

Tuesday, October 20, 2015 - 12:30
to 13:30