Is prospect theory still a thing? I distinctly remember reading that the main empirical result it's based on it's based on - loss aversion, didn't replicate except for large sums of money.
And for large sums of money, you don't need prospect theory to explain loss aversion. Plain old marginal utility will do.
Great question! One of the core results of this paper was to explain this discrepancy. Basically, we found a 'mixture of theories' - a hybrid of prospect theory and expected utility theory, where people essentially arbitrate between one of the two decision-making mechanisms depending on the complexity of the gamble.
You can generalize theories of decision-making into broad functional forms and then apply gradient descent to find the best parameters for that functional form. For example, prospect theory is multiply a utility weighting function U(x) with a probability weighting function p(x). Kahneman and Tversky proposed one specific set of U(x) and p(x), but we can use autodiff to generate all.
Is prospect theory still a thing? I distinctly remember reading that the main empirical result it's based on it's based on - loss aversion, didn't replicate except for large sums of money.
And for large sums of money, you don't need prospect theory to explain loss aversion. Plain old marginal utility will do.
Great question! One of the core results of this paper was to explain this discrepancy. Basically, we found a 'mixture of theories' - a hybrid of prospect theory and expected utility theory, where people essentially arbitrate between one of the two decision-making mechanisms depending on the complexity of the gamble.
I'm one of the co-authors of this article.
The TLDR of this paper:
You can generalize theories of decision-making into broad functional forms and then apply gradient descent to find the best parameters for that functional form. For example, prospect theory is multiply a utility weighting function U(x) with a probability weighting function p(x). Kahneman and Tversky proposed one specific set of U(x) and p(x), but we can use autodiff to generate all.
We can apply this method to any functional form.
Happy to answer any questions!
(2021)