The role of aspiration level in risky choice: A comparison of cumulative prospect theory and SP/A theory (Q1304538): Difference between revisions

There are three approaches in decision making under risk: maximizing expected utility (economists), achieving an optimal balance between risk and return (investment professionals) and information processing models focused on how people choose (psychologists). Recently both psychologists and economists explore a nonlinear modification of the expected utility model, named decumulatively weighted utility model. In the paper decumulatively weighted utility model is presented, then cumulative prospect theory and SP/A (security-potential criterion and aspiration criterion) theory are described. Next, the authors test the ability of these two theories to account for the same set of data (experiment 1 and experiment 2). The authors claim that the model comparison in experiment 1 showed that, on six parameters, SP/A does a better job than the CPT. Decumulatively weighted utility model has not affected practice in finance. The authors suggest how some results might apply in the investment context.