We develop a new version of prospect theory that employs cumulative rather than separable decision weights and extends the theory in several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses. Two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment confirm a distinctive fourfold pattern of risk attitudes: risk aversion for gains and risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low probability. Expected utility theory reigned for several decades as the dominant normative and descriptive model of decision making under uncertainty, but it has come under serious question in recent years. There is now general agreement that the theory does not provide an adequate description of individual choice: a substantial body of evidence shows that decision makers systematically violate its basic tenets. Many alternative models have been proposed in response to this empirical challenge (for reviews, see Camerer, 1989; Fishburn, 1988; Machina, 1987). Some time ago we presented a model of choice, called prospect theory, which explained the major violations of expected utility theory in choices between risky prospects with a small number of outcomes (Kahneman and Tversky, 1979; Tversky and Kahneman, 1986). The key elements of this theory are 1) a value function that is concave for gains, convex for losses, and steeper for losses than for gains,

http://psych.fullerton.edu/mbirnbaum/psych466/articles/Tversky_Kahneman_JRU_92.pdf

Advances in prospect theory: cumulative representation of uncertainty

This paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders. It presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary. Diversification within an intermediary serves to reduce these costs, even in a risk neutral economy. The paper presents some more general analysis of the effect of diversification on resolving incentive problems. In the environment assumed in the model, debt contracts with costly bankruptcy are shown to be optimal. The analysis has implications for the portfolio structure and capital structure of intermediaries.

/pdf/financial-intermediation-and-delegated-monitoring-3u3herhy0i.pdf

Financial Intermediation and Delegated Monitoring

/pdf/convex-analysisnoer-san-nojin-zhan-nituite-5dl2rbmoyr.pdf

Convex Analysisの二,三の進展について

Norms have never been absent from the study of international politics, but the sweeping “ideational turn” in the 1980s and 1990s brought them back as a central theoretical concern in the field. Much theorizing about norms has focused on how they create social structure, standards of appropriateness, and stability in international politics. Recent empirical research on norms, in contrast, has examined their role in creating political change, but change processes have been less well-theorized. We induce from this research a variety of theoretical arguments and testable hypotheses about the role of norms in political change. We argue that norms evolve in a three-stage “life cycle” of emergence, “norm cascades,” and internalization, and that each stage is governed by different motives, mechanisms, and behavioral logics. We also highlight the rational and strategic nature of many social construction processes and argue that theoretical progress will only be made by placing attention on the connections between norms and rationality rather than by opposing the two.

/pdf/international-norm-dynamics-and-political-change-37ig9r9dlq.pdf

International Norm Dynamics and Political Change

Convergence of Probability Measures. By P. Billingsley. Chichester, Sussex, Wiley, 1968. xii, 253 p. 9 1/4“. 117s.

Convergence of Probability Measures

"Expected Utility" Analysis without the Independence Axiom

Ffifteen years ago, the theory of choice under uncertainty could be considered one of the “success stories” of economic analysis: it rested on solid axiomatic foundations, it had seen important breakthroughs in the analytics of risk, risk aversion and their applications to economic issues, and it stood ready to provide the theoretical underpinnings for the newly emerging “information revolution” in economics.1 Today choice under uncertainty is a field in flux: the standard theory is being challenged on several grounds from both within and outside economics. The nature of these challenges, and of our profession’s responses to them, is the topic of this paper.

/pdf/choice-under-uncertainty-problems-solved-and-unsolved-1m78xuz7n1.pdf

Choice under Uncertainty: Problems Solved and Unsolved

/pdf/expected-utility-analysis-without-the-independence-axiom-4ox7a3a19o.pdf

Expected utility analysis without the independence axiom

Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty

Rationality is a complex behavioral theory that can be parsed into statements about preferences, perceptions, and process. This paper looks at the evidence on rationality that is provided by behavioral experiments, and argues that most cognitive anomalies operate through errors in perception that arise from the way information is stored, retrieved, and processed, or through errors in process that lead to formulation of choice problems as cognitive tasks that are inconsistent at least with rationality narrowly defined. The paper discusses how these cognitive anomalies influence economic behavior and measurement, and their implications for economic analysis.

http://mcadams.posc.mu.edu/econ/McFadden,%2520Rationality%2520for%2520Economists.pdf

Mark J. Machina

Papers

"Expected Utility" Analysis without the Independence Axiom

Choice under Uncertainty: Problems Solved and Unsolved

Expected utility analysis without the independence axiom

Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty

Rationality for Economists