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| David Alan Peel and David Law |
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| ''LOSS AVERSION AND RUINOUS OPTIMAL WAGERS IN CUMULATIVE PROSPECT THEORY'' |
| ( 2017, Vol. 37 No.1 ) |
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| We demonstrate that extant parametric specifications of Cumulative Prospect Theory exhibit counterfactual implications for optimal wagers at actuarially unfair odds. In particular they imply individuals may maximizes their utility, called value function in Cumulative Prospect Theory, by wagering all or large proportions of their wealth on actuarially unfair gambles. In order to eliminate this property it is necessary that loss aversion is unbounded and increases as stake size increases. We present new parametric specifications of the value function over losses that exhibit this feature and therefore eliminate the ruinous wagering property |
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| Keywords: Cumulative Prospect Theory, Loss Aversion, Optimal Wagering |
JEL: B4 - Economic Methodology: General
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| Manuscript Received : Apr 29 2016 | | Manuscript Accepted : Feb 22 2017 |
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