Never, Ever Getting Started: On Prospect Theory Without Commitment

21 Pages Posted: 19 Apr 2016 Last revised: 15 Feb 2017

Sebastian Ebert

Tilburg University

Philipp Strack

University of California, Berkeley - Department of Economics

Date Written: April 15, 2016

Abstract

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

Ebert, Sebastian and Strack, Philipp, Never, Ever Getting Started: On Prospect Theory Without Commitment (April 15, 2016). Available at SSRN: https://ssrn.com/abstract=2765550 or http://dx.doi.org/10.2139/ssrn.2765550

Sebastian Ebert (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Philipp Strack

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://philippstrack.com

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