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versione breve 
The prospect theory of Kahneman and Tversky (in Econometrica 47(2),
263–291, 1979) and the cumulative prospect theory of Tversky
and Kahneman (in J. Risk uncertainty 5, 297–323, 1992) are
descriptive models for decision making that summarize several
violations of the expected utility theory. This paper gives a survey
of applications of prospect theory to the portfolio choice problem
and the implications for asset pricing. We demonstrate that prospect
theory (and similarly cumulative prospect theory) has to be
remodelled if one wants to apply it to portfolio selection. We
suggest replacing the piecewise power value function of Tversky and
Kahneman (in J. Risk uncertainty 5, 297–323, 1992) with a
piecewise negative exponential value function. This latter
functional form is still compatible with laboratory experiments but
it has the following advantages over and above Tversky and
Kahneman’s piecewise power function: 1. The Bernoulli Paradox does not arise for lotteries with finite expected value. 2. No infinite leverage/robustness problem arises. 3. CAPMequilibria with heterogeneous investors and prospect utility do exist. 4. It is able to simultaneously resolve the following asset pricing puzzles: the equity premium, the value and the size puzzle. In contrast to the piecewise power value function it is able to explain the disposition effect. Resolving these problems of prospect theory we show how it can be combined with mean–variance portfolio theory. 
tipo  Journal paper 
parole chiave 

lingua  English 
kind of paper  journal article 
data di apparenza  192006 
giornale  Financial Markets and Portfolio Management 
Editore  Springer (Heidelberg) 
ISSN  15554961 
ISSN (online)  1555497X 
edizione del giornale  20 
numero del giornale  3 
pagine  339360 
review  blind review 
citation  De Giorgi, E., & Hens, T. (2006). Making Prospect Theory Fit for Finance. Financial Markets and Portfolio Management, 20(3), 339360. 