Reformulating prospect theory to become a von Neumann-Morgenstern theory

摘要

This paper reformulates Kahneman-Tversky's (KT's) cumulative prospect theory to become a von Neumann-Morgenstern (vNM) theory that is compatible with many existing economic, finance, psychology and decision theories. This vNM theory has the following desirable characteristics: consistently increasing utility of wealth, loss aversion, concave over favorable outcomes, convex over unfavorable outcomes, consistent preference for positively skewed outcomes and it spans the real line between -∞ and ∞. The weighted probabilities in KT's cumulative prospect theory do not align with the vNM requirement that the probabilities sum to one; nevertheless, important advantages are gained from this vNM assumption.