Prospect Theory and Disappointment Aversion
The Allais paradox is a problem designed by French economist Maurice Allais in 1953 to show common inconsistencies between the predictions of expected utility theory and actual observed choices of individuals. Many theories have been proposed to solve the Allais paradox, among which the Prospect Theory and the Theory of Disappointment Aversion, and both will be described in this essay.
Prospect Theory
Guthrie, C. (2003) describes how the two original proponents of the Prospect Theory, Daniel Kahneman and Amos Tversky, would meet every mid-day for a long time, and spend their time inventing interesting sets of gambles and observing our their ...
