Never, Ever Getting Started: On Prospect Theory Without Commitment
20 Pages Posted: 19 Apr 2016 Last revised: 29 Jul 2018
Date Written: June 16, 2018
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: Suggested Citation