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Violations of Cumulative Prospect Theory in Mixed Gambles with Moderate Probabilities

Erasmus School of Economics and Tinbergen Institute, P.O. Box 1738, Burgemeester Oudlaan 50, 3000 DR Rotterdam, The Netherlands
Erasmus School of Economics, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands
Robeco, P.O. Box 973, 3000 DR Rotterdam, The Netherlands
baltussen{at}few.eur.nl
gtpost{at}few.eur.nl
p.van.vliet{at}robeco.nl

In a classroom choice experiment with mixed gambles and moderate probabilities, we find severe violations of cumulative prospect theory (CPT) and of Markowitz stochastic dominance. Our results shed new light on the exchange between Levy and Levy (2002) and Wakker (2003) in this journal.

Key Words: cumulative prospect theory; expected utility; mixed gambles; stochastic dominance; individual decision making under risk
History: Received: January 4, 2006;

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