Philipp Strack

Never, Ever Getting Started: On Prospect Theory Without Commitment

We characterize the investment or gambling behavior of a prospect theory decision maker who is aware of his time-inconsistency, but lacks commitment. Such a "sophisticate" takes fewer risks than an expected utility maximizer with the same utility function (but no probability weighting). For most prospect theory specifications, a sophisticate never gambles or invests in the stock market, even if expected gains are arbitrarily high. This result is the antithesis to Ebert and Strack (2015), who show that decision makers who are naive about their time inconsistency never stop gambling.

This is based on a joint work with Sebastian Ebert.