On Mental Transformations
29 Pages Posted: 23 Jul 2009 Last revised: 26 Jul 2011
Date Written: July 22, 2009
This paper presents an alternative interpretation of the experimental data published by Kahneman and Tversky in their 1992 paper describing Cumulative Prospect Theory. It was assumed that mental transformations such as mental adaptation, prospect scaling, and logarithmic perception should be considered when analyzing the experimental data. This led to the design of a solution that did not require the probability weighting function. The double S-type function obtained (the decision utility) resembles the utility curve specified by the Markowitz hypothesis (1952) and substitutes the fourfold pattern of risk attitudes introduced by Cumulative Prospect Theory.
Keywords: Prospect/Cumulative Prospect Theory, Markowitz Utility Hypothesis, Utility & Aspiration Functions, Mental Processes, Adaptation & Attention Focus
JEL Classification: D03, D81, C91
Suggested Citation: Suggested Citation