Decision-making under uncertainty - A field study of cumulative prospect theory

Gregory Gurevich, Doron Kliger, Ori Levy

Research output: Contribution to journalArticlepeer-review


The presented research tests cumulative prospect theory (CPT, [Kahneman, D., Tversky, A., 1979. Prospect theory: An analysis of decision under risk. Econometrica 47, 263-291; Tversky, A., Kahneman, D., 1981. The framing of decisions and the psychology of choice. Science 211, 453-480]) in the financial market, using US stock option data. Option prices possess information about actual investors' preferences in such a way that an exploitation of conventional option analysis, along with theoretical relationships, makes it possible to elicit investor preferences. The option data in this study serve for estimating the two essential elements of the CPT, namely, the value function and the probability weighting function. The main part of the work focuses on the functions' simultaneous estimation under CPT original parametric specification. The shape of the estimated functions is found to be in line with theory. Comparing to results of laboratory experiments, the estimated functions are closer to linearity and loss aversion is less pronounced.

Original languageEnglish
Pages (from-to)1221-1229
Number of pages9
JournalJournal of Banking and Finance
Issue number7
StatePublished - Jul 2009


  • Cumulative prospect theory
  • Loss aversion
  • Probability weighting function
  • Value function

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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