Cumulative prospect theory and imprecise risk

Tversky and Kahneman have worked out an appealing model of decision making under uncertainty, involving rank- and sign-dependent utilities. This model, cumulative prospect theory (CPT), as well as related models proposed by other authors, has received wide acclaim. Available information and psychological attitude facing ambiguity jointly determine the subjective likelihood values the decision maker attributes to events, expressed by either one of two capacities depending on the prospect of either gains or losses; unfortunately, neither interpretation of these capacities nor prevision of their links are straightforward. An insight into these issues is given by studying consistency of CPT with certain generalized expected utility models, when faced with objective data described by lower-upper probability intervals. Means of testing the existence of subjectively lower-upper probabilized events are obtained, as well as means of evaluating ambiguity aversion. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: D81.