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Course, academic year 2019/2020
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Prospect Theory - NMEK617
Title in English: Teorie prospektů
Guaranteed by: Department of Probability and Mathematical Statistics (32-KPMS)
Faculty: Faculty of Mathematics and Physics
Actual: from 2017
Semester: summer
E-Credits: 3
Hours per week, examination: summer s.:2/0 Ex [hours/week]
Capacity: unlimited
Min. number of students: unlimited
State of the course: taught
Language: Czech, English
Teaching methods: full-time
Guarantor: RNDr. Martin Šmíd, Ph.D.
Class: Pravděp. a statistika, ekonometrie a fin. mat.
M Mgr. PMSE
M Mgr. PMSE > Volitelné
Classification: Mathematics > Math. Econ. and Econometrics
Annotation -
Last update: T_KPMS (19.04.2017)
Prospect theory is a Nobel prize winning non-trivial mathematical model of decision under uncertainty, slowly becoming a mainstream in decision theory thanks to its wide applicability and empirical validity. The lecture proceeds chronologically according to the advancement of the field; for each theoretical approach, a characterization theorem is proved. Moreover, methods of empirical validations of decision models are explained and science-philosophical aspects are discussed.
Aim of the course -
Last update: RNDr. Pavel Zakouřil, Ph.D. (29.06.2015)

Besides the Prospect Theory itself and its selected applications, its predecessors are discussed and methods of calibration of decision models are explained, so that a student will be able to apply the theory in practice. For better understanding, real-life examples are given and thought experiments performed.

Course completion requirements -
Last update: RNDr. Jitka Zichová, Dr. (23.04.2018)

Oral exam.

Literature -
Last update: RNDr. Pavel Zakouřil, Ph.D. (29.06.2015)

Wakker, Peter P. Prospect theory: For risk and ambiguity. Cambridge University Press, 2010.

Gilboa, Itzhak. Theory of decision under uncertainty. Cambridge: Cambridge university press, 2009.

Kahneman, Daniel, and Amos Tversky. "Prospect theory: An analysis of decision under risk." Econometrica: Journal of the Econometric Society (1979): 263-291.

Tversky, Amos, and Daniel Kahneman. "Advances in prospect theory: Cumulative representation of uncertainty." Journal of Risk and uncertainty 5.4 (1992): 297-323.

Wakker, Peter, and Amos Tversky. "An axiomatization of cumulative prospect theory." Journal of risk and uncertainty 7.2 (1993): 147-175.

Teaching methods -
Last update: RNDr. Pavel Zakouřil, Ph.D. (29.06.2015)

Lecture

Requirements to the exam -
Last update: RNDr. Jitka Zichová, Dr. (28.02.2018)

The exam is oral. Selected topics from the syllabus of the subject are examinated.

Syllabus -
Last update: RNDr. Pavel Zakouřil, Ph.D. (29.06.2015)

1. Introduction

  • inductive and deductive scientific reasoning
  • consistency, operationalisation, falsifiability
  • descriptive and normative aspects of theories
  • randomness versus determinism
  • principle of indifference, frequentism, Bayesian approach
  • methodology of economic excperiments

2. Theory of expected utility

  • existence and uniqueness of subjective probabilities (de Finetti), of utility function (von Neumann-Morgenstern), of both of them simultaneously (Savage)
  • cretique: Allais paradox, small probabilities effect, loss aversion, isolation effects

3. Decision with unknown probabilities

  • Ellseberg paradox
  • capacity and Choquet integral
  • existence a unequeness of utility function and of capacities

4. Prospect theory

  • original version (1979)
  • cumulative version (1992)
  • existence aand uniqueness of value function and of decision weights
  • selected applications in finance, insurance and politics

 
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