A Further Critique of Cumulative Prospect Theory and Related Approaches

Abstract

This article builds on prior work done in Nwogugu (2005a, 2005b), and proves and illustrates in more formal methods, that cumulative prospect theory/prospect theory and related models are inaccurate and were derived from improper methods and calculations. Furthermore, evidence from neuro-biology shows that the natural mental processes of human beings will result in decision making patterns that differ from what is predicted and implicit in Cumulative Prospect Theory and Prospect Theory. Decision making and risk assessment are multi-criteria processes that typically require some processing of information, and thus cannot be defined accurately by rigid quantitative models. CPT/PT do not incorporate the many psychological, legal, biological, knowledge, and situational price-dynamic factors inherent in decision making. Thus, there is a need for more realistic decision models.

Keywords: cumulative prospect theory, decision making, complexity, cognitive psychology