Making prospect theory fit for finance

摘要: The prospect theory of Kahneman and Tversky (in Econometrica 47(2), 263–291, 1979) the cumulative J. Risk uncertainty 5, 297–323, 1992) are descriptive models for decision making that summarize several violations expected utility theory. This paper gives a survey applications to portfolio choice problem implications asset pricing. We demonstrate (and similarly theory) has be re-modelled if one wants apply it selection. suggest replacing piecewise power value function with negative exponential function. latter functional form is still compatible laboratory experiments but following advantages over above Kahneman’s function: 1. Bernoulli Paradox does not arise lotteries finite value. 2. No infinite leverage/robustness arises. 3. CAPM-equilibria heterogeneous investors do exist. 4. It able simultaneously resolve pricing puzzles: equity premium, size puzzle. In contrast explain disposition effect. Resolving these problems we show how can combined mean–variance