The main focus of this tutorial/review is on presenting Prospect Theory in the context of the still ongoing debate between the behavioral (mainly descriptive) and the classical (mainly normative) approach in decision theory under risk and uncertainty. The goal is to discuss Prospect Theory vs. Expected Utility in a comparative way. We discuss: a) which assumptions (implicit and explicit) of the classical theory are being questioned in Prospect Theory; b) how does the theory incorporate robust experimental evidence, striving, at the same time, to find the right balance between the basic rationality postulates of Expected Utility (e.g. monotonicity wrt. First-Order Stochastic Dominance), psychological plausibility and mathematical elegance; c) how are risk attitudes modeled in the theory. In particular we discuss prospect stochastic dominance and the three-pillar structure of modeling risk attitudes in Prospect Theory involving: the non-additive decision weights with lower and upper subadditivity and their relationship to the notions of pessimism and optimism, as well as preferences towards consequences separated into preferences within and across the domains of gains and losses (corresponding to basic utility and loss aversion), d) example applications of Prospect Theory.

JO - Central European Journal of Economic Modelling and Econometrics L1 - http://journals.pan.pl/Content/106527/PDF/mainFile.pdf L2 - http://journals.pan.pl/Content/106527 PY - 2017 IS - No 4 EP - 321 KW - rank-dependence KW - independence KW - loss aversion KW - prospect stochastic dominance KW - pessimism and optimism A1 - Lewandowski, Michał PB - Oddział PAN w Łodzi JF - Central European Journal of Economic Modelling and Econometrics DA - 31.12.2017 T1 - Prospect Theory Versus Expected Utility Theory: Assumptions, Predictions, Intuition and Modelling of Risk Attitudes SP - 275 UR - http://journals.pan.pl/dlibra/docmetadata?id=106527 DOI - 10.24425/cejeme.2017.122213 ER -