Until the Bitter End: On Prospect Theory in a Dynamic Context
Sebastian Ebert, Philipp Strack
American Economic Review · 2015 · Volume 105 · Issue 4
Abstract
We provide a result on prospect theory decision makers who are naïve about the time inconsistency induced by probability weighting. If a market offers a sufficiently rich set of investment strategies, investors postpone their trading decisions indefinitely due to a strong preference for skewness. We conclude that probability weighting in combination with naïveté leads to unrealistic predictions for a wide range of dynamic setups. (JEL D81, G02, G11)
Keywords
Criteria for Decision-Making under Risk and Uncertainty, Behavioral Finance: Underlying Principles, Portfolio Choice, Investment Decisions
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