Alternation bias and the parameterization of cumulative prospect theory
pp. 91-107
in: Mohammed Abdellaoui, John D. Hey (eds), Advances in decision making under risk and uncertainty, Berlin, Springer, 2008Abstract
Several authors have recently addressed the question of whether cumulative prospect theory (CPT) resolves the St. Petersburg Paradox (Blavatskyy, 2005; Rieger & Wang, 2006). These authors show that direct application of CPT to the St. Petersburg gamble fails to resolve the paradox under most conventional CPT parameterizations. They also propose a number of remedial fixes to CPT, central among which is a constraint on the value function exponent to be smaller than the probability weighting function exponent (α < γ). As this constraint is violated by most experimentally determined CPT parameterizations,1 the remedy amounts to a fundamental reparameterization of CPT.