Never, Ever Getting Started: On Prospect Theory Without Commitment

20 Pages Posted: 19 Apr 2016 Last revised: 29 Jul 2018

See all articles by Sebastian Ebert

Sebastian Ebert

Frankfurt School of Finance & Management gemeinnützige GmbH

Philipp Strack

Yale, Department of Economics

Date Written: June 16, 2018

Abstract

Prospect theory is arguably the most prominent alternative to expected utility theory. We study the investment or gambling behavior of a prospect theory decision maker who is aware of his time-inconsistency but lacks commitment. For the empirically relevant prospect theory specifications, we obtain the extreme prediction that such a decision maker never gambles or invests in the stock market — even if expected gains are arbitrarily high. When taken to dynamic settings, prospect theory needs to be modified if it is supposed to yield more realistic predictions.

Keywords: Prospect Theory, Risk-Taking, Skewness Preference, Time- Inconsistency

JEL Classification: G02, D03, D81

Suggested Citation

Ebert, Sebastian and Strack, Philipp, Never, Ever Getting Started: On Prospect Theory Without Commitment (June 16, 2018). Available at SSRN: https://ssrn.com/abstract=2765550 or http://dx.doi.org/10.2139/ssrn.2765550

Sebastian Ebert (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Philipp Strack

Yale, Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

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