American Economic Review Vol. 105 No. 4 2015

Until the Bitter End: On Prospect Theory in a Dynamic Context

Sebastian Ebert¹; Philipp Strack²

¹ Department of Finance, Tilburg University, PO Box 90153, 5000 LE Tilburg, The Netherlands (e-mail: ) · ² Department of Economics, University of California at Berkeley, 513 Evans Hall, Berkeley, CA 94720 (e-mail: )

Abstract

We provide a result on prospect theory decision makers who are naïve about the time inconsistency induced by probability weighting. If a market offers a sufficiently rich set of investment strategies, investors postpone their trading decisions indefinitely due to a strong preference for skewness. We conclude that probability weighting in combination with naïveté leads to unrealistic predictions for a wide range of dynamic setups.

DOI

10.1257/aer.20130896

Volume

105

Issue

4

Pages

1618-1633

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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