Original Research

Does prospect theory warrant a paradigm shift in the economics of risk?

PL Mohapi
South African Journal of Economic and Management Sciences | Vol 9, No 2 | a1149 | DOI: https://doi.org/10.4102/sajems.v9i2.1149 | © 2014 PL Mohapi | This work is licensed under CC Attribution 4.0
Submitted: 10 July 2014 | Published: 10 July 2014

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PL Mohapi, National University of Lesotho

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Abstract

This paper assesses whether a paradigm shift should be made from expected utility framework to prospect theory framework – in the economics of choice under risk. A brief overview of the subject is outlined, starting with expected utility theory and noting its descriptive limitations. Proposed theories to make up for these limitations is also provided. Prospect theory emerged as the most serious challenger to expected utility theory. A review of some descriptive predictions of prospect theory, suggests that there is no scientific reason why expected utility should not be ousted from dominance by prospect theory. The shift to prospect theory however is not without costs. Conceptual complexities and non-universality of application associated with prospect theory should be embraced with the shift while not entirely abandoning expected utility theory.

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