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Randomized strategies and prospect theory in a dynamic context
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Henderson, Vicky, Hobson, David G. and Tse, Alex Sing-Lam (2017) Randomized strategies and prospect theory in a dynamic context. Journal of Economic Theory, 168 . pp. 287-300. doi:10.1016/j.jet.2017.01.003 ISSN 0022-0531.
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Official URL: http://dx.doi.org/10.1016/j.jet.2017.01.003
Abstract
When prospect theory (PT) is applied in a dynamic context, the probability weighting com- ponent brings new challenges. We study PT agents facing optimal timing decisions and consider the impact of allowing them to follow randomized strategies. In a continuous-time model of gam- bling and optimal stopping, Ebert and Strack (2015) show that a naive PT investor with access only to pure strategies never stops. We show that allowing randomization can signi cantly alter the predictions of their model, and can result in voluntary cessation of gambling.
Item Type: | Journal Article | ||||||||||
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Subjects: | H Social Sciences > HB Economic Theory | ||||||||||
Divisions: | Faculty of Science, Engineering and Medicine > Science > Statistics | ||||||||||
Library of Congress Subject Headings (LCSH): | Economics -- Psychological aspects -- Mathematical models, Gambling, Probabilities | ||||||||||
Journal or Publication Title: | Journal of Economic Theory | ||||||||||
Publisher: | Academic Press | ||||||||||
ISSN: | 0022-0531 | ||||||||||
Official Date: | March 2017 | ||||||||||
Dates: |
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Volume: | 168 | ||||||||||
Page Range: | pp. 287-300 | ||||||||||
DOI: | 10.1016/j.jet.2017.01.003 | ||||||||||
Status: | Peer Reviewed | ||||||||||
Publication Status: | Published | ||||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||||
Date of first compliant deposit: | 3 January 2017 | ||||||||||
Date of first compliant Open Access: | 6 August 2018 | ||||||||||
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