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Prospect Theory - NMEK617

Title:	Teorie prospektů
Guaranteed by:	Department of Probability and Mathematical Statistics (32-KPMS)
Faculty:	Faculty of Mathematics and Physics
Actual:	from 2021
Semester:	summer
E-Credits:	3
Hours per week, examination:	summer s.:2/0, Ex [HT]
Capacity:	unlimited
Min. number of students:	unlimited
4EU+:	no
Virtual mobility / capacity:	no
State of the course:	cancelled
Language:	Czech, English
Teaching methods:	full-time
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

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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