Peel, David Alan (2017) Wagering on more than one outcome in an event in Cumulative Prospect Theory and Rank Dependent Utility. Economics Letters, 154. pp. 45-47. ISSN 0165-1765
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Abstract
In this letter we illustrate a previously unrecognised implication of Cumulative Prospect Theory and Rank Dependent Utility. We demonstrate that the representative individual in both models will often engage in wagering on more than one outcome in an event. For instance when playing European roulette the representative agents in CPT or RDU will always optimally wager on more than one outcome. This implication contrasts with expected utility models of wagering based on risk-seeking preferences due to the assumption of a convex segment of the utility function.