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Contribution Details
| Type | Conference Presentation |
| Scope | Contributions to practice |
| Title | A Satisficing Alternative to Prospect Theory |
| Organization Unit | |
| Authors |
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| Presentation Type | speech |
| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Event Title | 5th Annual CARISMA (Conference 2010: The Interface of Behavioural Finance and Quantitative Finance) |
| Event Type | conference |
| Event Location | London |
| Event Start Date | February 2 - 2010 |
| Event End Date | February 3 - 2010 |
| Abstract Text | In this paper, we axiomatize a target-based model of choice that allows decision makers to be both risk averse and risk seeking, depending on the payoff's position relative to a prespecified target. The approach can be viewed as a hybrid model, capturing in spirit two celebrated ideas: first, the satisficing concept of Simon (1955); second, the switch between risk aversion and risk seeking popularized by the prospect theory of Kahneman and Tversky (1979). Our axioms are simple and intuitive; in order to be implemented in practice, our approach requires only the specification of an aspiration level. We show that this approach is dual to a known approach using risk measures, thereby allowing us to connect to existing theory. Though our approach is intended to be normative, we also show that it resolves the classical examples of Allais (1953) and Ellsberg (1961). |
| Official URL | http://ideas.repec.org/p/usg/dp2009/2009-09.html |
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| Additional Information | Also presented at: Workshop on Risk Measures and Robust Optimization in Finance, National University of Singapore, November 16 - 20, 2009 and ESE Conferences Behavioural Economics, Erasmus School of Economics, Rotterdam, November 4, 2009. |