Cumulative Prospect Theory Calculator



Cumulative Prospect Theory Calculator helps calculating the Cumulative Prospect Theory.

The Power of Gains (α)

The Power of Gains = 0.88, in T&K

The Power of Losses (β)

The Power of Losses = 0.88, in T&K

Loss aversion Coefficient (λ)

Loss aversion Coefficient = 2.25, in T&K

Probability Weighting Parameter for Gains (γ)

Probability weighting parameter for gains = 0.61, in T&K

Probability Weighting Parameter for Losses (δ)

Probability weighting parameter for losses = 0.69, in T&K

Outcomes and Probabilities:

Insert all outcomes of the risky asset:

First Outcome: $, with Probability of %

Second Outcome: $, with Probability of %

Third Outcome: $, with Probability of %

Fourth Outcome: $, with Probability of %

Fifth Outcome: $, with Probability of %

What is Prospect Theory?

Prospect Theory is a theory in cognitive psychology that describes the way people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are uncertain. The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using some heuristics. The model is descriptive: it tries to model real-life choices, rather than optimal decisions, as normative models do.

The theory was created in 1979 and developed in 1992 by Daniel Kahneman and Amos Tversky as a psychologically more accurate description of decision making, compared to the expected utility theory. In the original formulation, the term prospect referred to a lottery. The paper "Prospect Theory: An Analysis of Decision under Risk" (1979) has been called a "seminal paper in behavioral economics".

Tversky, Amos & Daniel Kahneman (1992), "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, 5, 297-323.