Prospect Theory and Higher Moments

Arbeitspapier

The paper relates cumulative prospect theory to the moments of returns distributions, e.g. skewness and kurtosis, assuming returns are normal inverse Gaussian distributed. The normal inverse Gaussian distribution parametrizes the first- to forth-order moments, making the investigation straightforward. Cumulative prospect theory utility is found to be positively related to the skewness. However, the relation is negative when probability weighing is set aside. This shows that cumulative prospect theory investors display a preference for skewness through the probability weighting function. Furthermore, the investor’s utility is inverse hump-shape related to the kurtosis. Consequences for portfolio choice issues are studied. The findings, among others, suggest that optimal cumulative prospect theory portfolios are not meanvariance efficient under the normal inverse Gaussian distribution.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2006:24

Classification and Topics

• Classification: Wirtschaft ; Criteria for Decision-Making under Risk and Uncertainty ; Portfolio Choice; Investment Decisions
• Subject: cumulative prospect theory ; skewness ; kurtosis ; normal inverse Gaussian distribution ; portfolio choice ; Prospect Theory ; Portfolio-Management ; Anlageverhalten ; Beschränkte Rationalität

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ågren, Martin
• Event: Veröffentlichung
• (who): Uppsala University, Department of Economics
• (where): Uppsala
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/82710
• URN: urn:nbn:se:uu:diva-83261
• Last update: 10.03.2025, 11:43 AM CET