Until the Bitter End: On Prospect Theory in a Dynamic Context

摘要

We provide a result on prospect theory decision makers who are naive about the time inconsistency induced by probability weighting. If a market offers a sufficiently rich set of investment strategies, investors postpone their trading decisions indefinitely due to a strong preference for skewness. We conclude that probability weighting in combination with naivete leads to unrealistic predictions for a wide range of dynamic setups.