Skip to main navigation Skip to main content Skip to page footer
WWT3 Sitepackage WWT3 Sitepackage

Journal Article

Third-Generation Prospect Theory

Authors

  • Starmer
  • C.
  • Sudgen
  • R.
  • Schmidt
  • U.

Publication Date

JEL Classification

D81

Key Words

preference reversal

prospect theory

reference dependence

We present a new theory of decision under uncertainty: third-generation prospect theory (PT3). This retains the predictive power of previous versions of prospect theory, but extends that theory by allowing reference points to be uncertain while decision weights are specified in a rank-dependent way. We show that PT3 preferences respect a state-conditional form of stochastic dominance. The theory predicts the observed tendency for willingness-to-accept valuations of lotteries to be greater than willingness-to-pay valuations. When PT3 is made operational by using simple functional forms with parameter values derived from existing experimental evidence, it predicts observed patterns of the preference reversal phenomenon.

Kiel Institute Expert

  • Prof. Dr. Dr. Ulrich Schmidt
    Research Director

More Publications

Subject Dossiers

  • Production site fully automatic with robot arms

    © xieyuliang – iStockphoto

    Economic Outlook

  • Inside shoot of the cupola of the Reichstag, the building of the German Bundestag.

    © Erik Cleves Kristensen CC BY 2.0

    Economic Policy in Germany

  • Colorful flags of European countires in front of an official EU building.

    © European Union 2016, Source EP

    Tension within the European Union

Research Center

  • Macroeconomics

Cookie Extension Logo