Expected utility versus cumulative prospect theory in an evolutionary model of bargaining

I examine the effect of decision-making processes on the dynamics of bargaining over a fixed pie by comparing the share received when individuals are subject to reference-dependent preferences, loss-aversion, and probability-weighting, to the share they would receive on choosing by maximising expect...

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Bibliographic Details
Published inJournal of economic dynamics & control Vol. 137; p. 104332
Main Author Khan, Abhimanyu
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.04.2022
Subjects
Bargaining
Cumulative prospect theory
Evolution
Expected utility
Loss-aversion
Probability-weighting
Reference-dependent preference
D01
C78
Reference-dependent preference
Cumulative prospect theory
Probability-weighting
Loss-aversion
Bargaining
Evolution
D90
Expected utility
D81
C73
D83
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Summary:I examine the effect of decision-making processes on the dynamics of bargaining over a fixed pie by comparing the share received when individuals are subject to reference-dependent preferences, loss-aversion, and probability-weighting, to the share they would receive on choosing by maximising expected utility instead. I show that: (i) reference-dependent preferences are unambiguously advantageous, (ii) loss-aversion does not have any effect, and (iii) probability-weighting is unambiguously disadvantageous. Finally, when these three features come together so that the decision-making process is described by cumulative prospect theory, then a higher share is obtained if and only if the advantage conferred by reference-dependent preferences is stronger than the disadvantage imposed by probability-weighting, and I present a precise necessary and sufficient condition that expresses this trade-off.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2022.104332