http://dx.doi.org/10.1093/amrx/abq013">
 

Document Type

Journal Article

Department/Unit

Department of Economics

Title

Prospect theory, indifference curves, and hedging risks

Language

English

Abstract

The prospect theory is one of the most popular decision-making theories. It is based on S-shaped utility functions, unlike the von Neumann and Morgenstern (NM) theory, which is based on concave utility functions. The S-shaped functions bring challenges, and extensions and generalizations of the NM theory into the prospect theory are not always possible. For example, in the prospect theory, the monotonicity of indifference curves depends on the underlying mean, unlike in the NM theory. Risk-hedging decisions also become more complex within the prospect theory. In this paper, we discuss these topics and establish general results concerning certain covariances from which we can in turn infer properties of indifference curves and hedging decisions within the prospect theory. © The Author 2010. Published by Oxford University Press. All rights reserved.

Publication Date

2010

Source Publication Title

Applied Mathematics Research eXpress

Volume

2010

Issue

2

Start Page

142

End Page

153

Publisher

Oxford University Press

ISSN (print)

16871200

ISSN (electronic)

16871197

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