Violations of Cpt in Mixed Gambles

Management Science, Vol. 52, No. 8, pp. 1288-1290

17 Pages Posted: 27 Feb 2004

See all articles by Guido Baltussen

Guido Baltussen

Erasmus University Rotterdam (EUR); Robeco Quantitative Investments

Thierry Post

Graduate School of Business of Nazarbayev University

Pim van Vliet

Robeco Quantitative Investments

Abstract

This study conducts a classroom experiment and an online experiment to examine individual decision-making under risk. Like Levy and Levy (2002), the experiment uses pairs of mixed gambles with moderate probabilities to avoid the framing effect and certainty affect that may affect non-mixed gambles with extreme probabilities. Also, we use Stochastic Dominance criteria to avoid parametric specification of decision-maker preferences. Explicitly accounting for the Wakker (2003) comment, we find several serious violations of Cumulative Prospect Theory (CPT). In fact, in a head-to-head competition between Second-order Stochastic Dominance (SSD) and CPT, most individuals choose the SSD alternative.

Keywords: Cumulative prospect theory, expected utility, mixed gambles, probability weighting, stochastic dominance

Suggested Citation

Baltussen, Guido and Post, Thierry and van Vliet, Pim, Violations of Cpt in Mixed Gambles. Management Science, Vol. 52, No. 8, pp. 1288-1290, Available at SSRN: https://ssrn.com/abstract=506582

Guido Baltussen

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3011 AG
Netherlands

Thierry Post

Graduate School of Business of Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

Pim Van Vliet (Contact Author)

Robeco Quantitative Investments ( email )

Rotterdam, 3011 AG
Netherlands

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