Cumulative prospect theory and the St. Petersburg paradox

  title={Cumulative prospect theory and the St. Petersburg paradox},
  author={M. O. Rieger and Mei Wang},
  journal={Economic Theory},
  • M. O. Rieger, Mei Wang
  • Published 2004
  • Mathematics
  • Economic Theory
  • Summary.We find that in cumulative prospect theory (CPT) with a concave value function in gains, a lottery with finite expected value may have infinite subjective value. This problem does not occur in expected utility theory. The paradox occurs in particular in the setting and the parameter regime studied by Tversky and Kahneman [15] and in subsequent works. We characterize situations in CPT where the problem can be resolved. In particular, we define a class of admissible probability… CONTINUE READING
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