Differences From Prospect Theory
The main modification to Prospect Theory is that, as in rank-dependent expected utility theory, cumulative probabilities are transformed, rather than the probabilities itself. This leads to the aforementioned overweighting of extreme events which occur with small probability, rather than to an overweighting of all small probability events. The modification helps to avoid a violation of first order stochastic dominance and makes the generalization to arbitrary outcome distributions easier. CPT is therefore on theoretical grounds an improvement over Prospect Theory.
Read more about this topic: Cumulative Prospect Theory
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