Lecture 12 (End of Chapter Questions)

Question 1

What is the difference between decision weight and probability?

Answer 1

Decision weights result from transformed cumulative probabilities.

Question 2

What is the shortcoming of Prospect Theory?

Answer 2

There might be a violation of stochastic dominance due to the overvaluation of small probabilities.

Question 3

What is the difference between PT and CPT?

Answer 3

• Under CPT cumulative instead of individual probabilities are transformed
• Under CPT stochastic dominance is never violated