Never, Ever Getting Started: On Prospect Theory Without Commitment
Posted: 19 Apr 2016 Last revised: 19 Dec 2017
Date Written: April 15, 2016
We characterize the investment or gambling behavior of a prospect theory decision maker who is aware of his time-inconsistency, but lacks commitment. Such a "sophisticate" takes fewer risks than an expected utility maximizer with the same utility function (but no probability weighting). For most prospect theory specifications, a sophisticate never gambles or invests in the stock market, even if expected gains are arbitrarily high. This result is the antithesis to Ebert and Strack 2015, who show that decision makers who are naive about their time inconsistency never stop gambling.
Keywords: Commitment, Prospect Theory, Risk-taking, Skewness Preference, Time-Inconsistency
JEL Classification: G02, D03, D81
Suggested Citation: Suggested Citation