Teorija izglednosti i rizik

This paper presents an axiomatic method for modeling human behavior under uncertainty and risk which development is observed as of the early beginning of expected utility theory up to composite cumulative prospect theory which incorporates thorough behavioral characteristics making its application even more welcome. An attempt to explain decision under uncertainty and risk that violate expected utility have resulted in several new ideas. One is to think of prospects in terms of gains and losses relative to neutral reference point. This notion was the cornerstone of Kahneman and Tversky’s prospect theory. The significance of the reference point arises from the fact that people are generally risk averse when they realize gain and risk seeking when they realize loss. Another generalization integrated in prospect theory is the tendency to overweight small probability and underweight high probability. Therefore, the modeling of this effect incorporates decision weights which transform the probability scale. This model transforms cumulative rather than individual probabilities. In this paper, we elaborated cumulative prospect theory which offered generalized decision theory using Quiggen’s rank dependent utility theory and ensuring that decision maker doesn’t necessarily chooses stochastically dominating outcome. Combining prospect theory and composite prospect theory results in composite cumulative prospect theory which not only embraces the overweighting of small probability outcome and underweighting high probability outcomes but also includes the decision makers occasional tendency to absolutely ignore unlikely outcomes as well as to consider highly likely events as certain. Due to its ability to describe complex human behavior, the application in practice is becoming more welcome, especially in finance, insurance and stock markets.