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

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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
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of 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:	Date Event March 2017 Published 6 January 2017 Available 3 January 2016 Accepted 20 April 2016 Submitted
Date of first compliant deposit:	3 January 2017
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
Related URLs:	Publisher

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