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Cumulative Prospect Theory

In their 1992 paper, Kahneman and Tversky developed an updated form of prospect theory, which they termed Cumulative Prospect Theory. The theory incorporates rank-dependent functionals which transform cumulative, rather than individual probabilities, in response to a growing literature, and satisfies stochastic dominance, which the original form of prospect theory does not. It retains the most crucial features, though, viz.:

  1. Gains and losses, i.e. income is the carriers of value, not final assets or wealth.
  2. The value of each outcome is multiplied by a decision weight, not an additive probability.

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