EXCERPT FROM

THE CUMULATIVE
REPRESENTATIO
N OF
UNCERTAINTY
By A.Tversky and D Kahneman

AUGUST 17, 2019

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TABLE OF CONTENTS
Advances in Prospect Theory: .................................................. 2

Cumulative Representation of Uncertainty .......................... 2

Abstract ....................................................................................... 2

Theory ......................................................................................... 4

1.2 More on prospect theory ..................................................... 5

2. Experiment ........................................................................... 5

2.1. Procedure .......................................................................... 6

2.2. Results .................................................................................. 6

2.3. Incentives .......................................................................... 8

3. Discussion ............................................................................. 10

Appendix: Axiomatic Analysis ...................................................... 0

Theorem ...................................................................................... 0

Theorem ...................................................................................... 0

Amos Tversky/Daniel Kahneman

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ADVANCES IN PROSPECT THEORY:

CUMULATIVE REPRESENTATION OF
UNCERTAINTY

AMOS TVERSKY

DANIEL KAHNEMAN1

Key words: cumulative prospect theory

ABSTRACT
We develop a new version of prospect theory that employs
cumulative rather than separable decision weights and
extends the theory in several respects. This version, called
cumulative prospect theory, applies to uncertain as well as to
risky prospects with any number of outcomes, and it allows
different weighting functions for gains and for losses. Two
principles, diminishing sensitivity and loss aversion, are
invoked to explain the characteristic curvature of the value
function and the weighting functions. A review of the
experimental evidence and the results of a new experiment

1
*An earlier version of this article was entitled "Cumulative Prospect Theory: An
Analysis of Decision under
Uncertainty."
This article has benefited from discussions with Colin Camerer, Chew Soo-Hong,
David Freedman, and David
H. Krantz. We are especially grateful to Peter P. Wakker for his invaluable input
and contribution to the
axiomatic analysis. We are indebted to Richard Gonzalez and Amy Hayes for
running the experiment and
analyzing the data. This work was supported by Grants 89-0064 and 88-0206 from
the Air Force Office of Scientific
Research, by Grant SES-9109535 from the National Science Foundation, and by
the Sloan Foundation.
1

Amos Tversky/Daniel Kahneman

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confirm a distinctive fourfold pattern of risk attitudes: risk

aversion for gains and risk seeking for losses of high
probability; risk seeking for gains and risk aversion for losses
of low probability.

Expected utility theory reigned for several decades as the

dominant normative and descriptive model of decision making
under uncertainty, but it has come under serious question in
recent years. There is now general agreement that the theory
does not provide an adequate description of individual choice:
a substantial body of evidence shows that decision makers
systematically violate its basic tenets. Many alternative
models have been proposed in response to this empirical
challenge (for reviews, see Camerer, 1989; Fish burn, 1988;
Machina, 1987). Some time ago we presented a model of
choice, called prospect theory, which explained the major
violations of expected utility theory in choices between risky
prospects with a small number of outcomes (Kahneman and
Tversky, 1979; Tversky and Kahneman, 1986). The key
elements of this theory are 1) a value function that is concave
for gains, convex for losses, and steeper for losses than for
gains,

and 2) a nonlinear transformation of the probability scale,

which overweights small probabilities and underweights
moderate and high probabilities. In an important later
development, several authors (Quiggin, 1982; Schmeidler,
1989; Yaari, 1987; Weymark, 1981) have advanced a new
representation, called the rank-dependent or the cumulative
functional, that transforms cumulative rather than individual
probabilities. This article presents a new version of prospect
theory that incorporates the cumulative functional and
extends the theory to uncertain as well to risky prospects with
any number of outcomes. The resulting model, called
cumulative prospect theory, combines some of the attractive
features of both developments (see also Luce and Fishburn,
1991). It gives rise to different evaluations of gains and
losses, which are not distinguished in the standard cumulative
model, and it provides a unified treatment of both risk and
uncertainty. To set the stage for the present development, we
first list five major phenomena of choice, which violate the
standard model and set a minimal challenge that must be met
by any adequate descriptive theory of choice. All these
findings have been confirmed in a number of experiments,
with both real and hypothetical payoffs. Framing effects. The
rational theory of choice assumes description invariance:
equivalent formulations of a choice problem should give rise
to the same preference order (Arrow, 1982). Contrary to this
assumption, there is much evidence that variations in the

Amos Tversky/Daniel Kahneman

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framing of options (e.g., in terms of gains or losses) yield

systematically different preferences (Tversky and Kahneman,
1986).

The present development explains loss aversion, risk

seeking, and nonlinear preferences in terms of the value and
the weighting functions. It incorporates a framing process,
and it can accommodate source preferences. Additional
phenomena that lie beyond the scope of the theory--and of its
alternatives--are discussed later. The present article is
organized as follows. Section 1.1 introduces the (two-part)
cumulative functional; section 1.2 discusses relations to
previous work; and section 1.3 describes the qualitative
properties of the value and the weighting functions. These
properties are tested in an extensive study of individual
choice, described in section 2, which also addresses the
question of monetary incentives. Implications and limitations
of the theory are discussed in section 3. An axiomatic analysis
of cumulative prospect theory is presented in the appendix.

THEORY
Prospect theory distinguishes two phases in the choice process:
framing and valuation. In the framing phase, the decision maker
constructs a representation of the acts, contingencies, and
outcomes that are relevant to the decision. In the valuation phase,
the decision maker assesses the value of each prospect and
chooses accordingly. Although no formal theory of framing is
available, we have learned a fair amount about the rules that govern
the representation of acts, outcomes, and contingencies (Tversky
and Kahneman, 1986). The valuation process discussed in
subsequent sections is applied to framed prospects.

1.1. CUMULATIVE PROSPECT THEORY

In the classical theory, the utility of an uncertain prospect is the sum
of the utilities of the outcomes, each weighted by its probability. The
empirical evidence reviewed above suggests two major
modifications of this theory: 1) the carriers of value are gains and
losses, not final assets; and 2) the value of each outcome is
multiplied by a decision weight, not by an additive probability. The
weighting scheme used in the original version of prospect theory
and in other models is a monotonic transformation of outcome
probabilities. This scheme encounters two problems. First, it does
not always satisfy stochastic dominance, an assumption that many
theorists are reluctant to give up. Second, it is not readily extended
to prospects with a large number of outcomes. These problems can
be handled by assuming that transparently dominated prospects
are eliminated in the editing phase, and by normalizing the weights

Amos Tversky/Daniel Kahneman

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so that they add to unity. Alternatively, both problems can be solved

by the rank-dependent or cumulative functional, first proposed by
Quiggin (1982) for decision under risk and by Schmeidler (1989) for
decision under uncertainty. Instead of transforming each probability
separately, this model transforms the entire cumulative distribution
function. The present theory applies the cumulative functional
separately to gains and to losses. This development extends
prospect theory to uncertain as well as to risky prospects with any
number of outcomes while preserving most of its essential features.
The differences between the cumulative and the original versions
of the theory are discussed in section 1.2. Let S be a finite set of
states of nature; subsets of S are called events. It is assumed that
exactly one state obtains, which is unknown to the decision maker.
Let X be a set of consequences, also called outcomes.

1.2 MORE ON PROSPECT THEORY

The decision weight 7ri +, associated with a positive outcome, is the
difference between the capacities of the events "the outcome is at
least as good asxi" and "the outcome is strictly better than xi." The
decision weight vi-, associated with a negative outcome, is the
difference between the capacities of the events "the outcome is at
least as bad asxi" and :'the outcome is strictly worse than xi." Thus,
the decision weight associated with an outcome can be interpreted
as the marginal contribution of the respective event, 1 defined in
terms of the capacities W + and W-. If each W is additive, and hence
a probability measure, then Wi is simply the probability of Ai. It
follows readily from the definitions of rr and that for both positive
and negative prospects, the decision weights add to 1. For mixed
prospects, however, the sum can be either smaller or greater than
1, because the decision weights for gains and for losses are defined
by separate capacities. If the prospect f = (xi,Ai) is given by a
probability distribution p(Ai) = Pi, it can be viewed as a probabilistic
or risky prospect (xi, Pi). In this case, decision weights are defined
by … provided p + q + r is sufficiently small. Equation (4) states that
w + is concave near the origin; and the conjunction of the above
inequalities implies that, in accord with diminishing sensitivity, w ÷
has an inverted S-shape: it is steepest near the endpoints and
shallower in the middle of the range. For other treatments of
decision weights, see Hogarth and Einhorn (1990), Prelec (1989),
Viscusi (1989), and Wakker (1990). Experimental evidence is
presented in the next section.

2. EXPERIMENT
An experiment was carried out to obtain detailed information about
the value and weighting functions. We made a special effort to
obtain high-quality data. To this end, we recruited 25 graduate
students from Berkeley and Stanford (12 men and 13 women) with
no special training in decision theory. Each subject participated in

Amos Tversky/Daniel Kahneman

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three separate one-hour sessions that were several days apart.

Each subject was paid $25 for participation.

2.1. PROCEDURE
The experiment was conducted on a computer. On a typical trial,
the computer displayed a prospect (e.g., 25% chance to win $150
and 75% chance to win $50) and its expected value. The display
also included a descending series of seven sure outcomes (gains
or losses) logarithmically spaced between the extreme outcomes of
the prospect. The subject indicated a preference between each of
the seven sure outcomes and the risky prospect. To obtain a more
refined estimate of the certainty equivalent, a new set of seven sure
outcomes was then shown, linearly spaced between a value 25%
higher than the lowest amount accepted in the first set and a value
25% lower than the highest amount rejected. The certainty
equivalent of a prospect was estimated by the midpoint between
the lowest accepted value and the highest rejected value in the
second set of choices. We wish to emphasize that although the
analysis is based on certainty equivalents, the data consisted of a
series of choices between a given prospect and several sure
outcomes. Thus, the cash equivalent of a prospect was derived
from observed choices, rather than assessed by the subject. The
computer monitored the internal consistency of the responses to
each prospect and rejected errors, such as the acceptance of a
cash amount lower than one previously rejected. Errors caused the
original statement of the problem to reappear on the screen. 3 The
present analysis focuses on a set of two-outcome prospects with
monetary outcomes and numerical probabilities. Other data
involving more complicated prospects, including prospects defined
by uncertain events, will be reported elsewhere. There were 28
positive and 28 negative prospects. Six of the prospects (three
nonnegative and three nonpositive) were repeated on different
sessions to obtain the estimate of the consistency of choice. Table
3 displays the prospects and the median cash equivalents of the 25
subjects. A modified procedure was used in eight additional
problems. In four of these problems, the subjects made choices
regarding the acceptability of a set of mixed prospects (e.g., 50%
chance to lose $100 and 50% chance to win x) in which x was
systematically varied. In four other problems, the subjects
compared a fixed prospect (e.g., 50% chance to lose $20 and 50%
chance to win $50) to a set of prospects (e.g., 50% chance to lose
$50 and 50% chance to win x) in which x was systematically varied.
(These prospects are presented in table 6.)

2.2. RESULTS
The most distinctive implication of prospect theory is the fourfold
pattern of risk attitudes. For the nonmixed prospects used in the

Amos Tversky/Daniel Kahneman

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present study, the shapes of the value and the weighting functions
imply risk-averse and risk-seeking preferences, respectively, for
gains and for losses of moderate or high probability. Furthermore,
the shape of the weighting functions favors risk seeking for small
probabilities of gains and risk aversion for small probabilities of loss,
provided the outcomes are not extreme. Note, however, that
prospect theory does not imply perfect reflection in the sense that
the preference between any two positive prospects is reversed
when gains are replaced by losses. Table 4 presents, for each
subject, the percentage of risk-seeking choices (where the certainty
equivalent exceeded expected value) for gains and for losses with
low (p _< .1) and with high (p _ .5) probabilities. Table 4 shows that
form _> .5, all 25 subjects are predominantly risk averse for positive
prospects and risk seeking for negative ones. Moreover, the entire
fourfold pattern is observed for 22 of the 25 subjects, with some
variability at the level of individual choices. Although the overall
pattern of preferences is clear, the individual data, of course, reveal
both noise and individual differences. The correlations, across
subjects, between lighting functions. A review of the experimental
evidence and the results of a new experiment confirm a distinctive
fourfold pattern of risk attitudes: risk aversion for gains and risk
seeking for losses of high probability; risk seeking for gains and risk
aversion for losses of low probability. Expected utility theory reigned
for several decades as the dominant normative and descriptive
model of decision making under uncertainty, but it has come under
serious question in recent years. There is now general agreement
that the theory does not provide an adequate description of
individual choice: a substantial body of evidence shows that
decision makers systematically violate its basic tenets. Many
alternative models have been proposed in response to this
empirical challenge.

Note: The two outcomes of each prospect are given in the left-hand
side of each row; the probability of the second (i.e., more extreme)
outcome is given by the corresponding column. For example, the
value of $9 in the upper left corner is the median cash equivalent of
the prospect (0, .9; $50, .1). the cash equivalents for the same
prospects on successive sessions averaged .55 over six
different prospects. Table 5 presents means (after transformation
to Fisher's z) of the
correlations between the different types of prospects. For example,
there were 19 and 17
prospects, respectively, with high probability of gain and high
probability of loss. The
value of .06 in table 5 is the mean of the 17 x 19 = 323 correlations
between the cash
equivalents of these prospects.

Amos Tversky/Daniel Kahneman

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Fig 1.
Fig 2.

2.3. INCENTIVES

We conclude this section with a brief discussion of the role of

monetary incentives. In the present study we did not pay subjects
on the basis of their choices because in our experience with choice
between prospects of the type used in the present study, we did not
find much difference between subjects who were paid a flat fee and
subjects whose payoffs were contingent on their decisions. The
same conclusion was obtained by Camerer (1989), who
investigated the effects of incentives using several hundred
subjects. He found that subjects who actually played the gamble
gave essentially the same responses as subjects who did not play;
he also found no differences in reliability and roughly the same
decision time. Although some studies found differences between
paid and unpaid subjects in choice between simple prospects,
these differences were not large enough to change any significant
qualitative conclusions. Indeed, all major violations of expected
utility theory (e.g. the common consequence effect, the common
ratio effect, source dependence, loss aversion, and preference
reversals) were obtained both with and without monetary
incentives. As noted by several authors, however, the financial
incentives provided in choice experiments are generally small
relative to people's incomes. What happens when the stakes
correspond to three- or four-digit rather than one- or two-digit
figures? To answer this question, Kachelmeier and Shehata (1991)

Amos Tversky/Daniel Kahneman

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conducted a series of experiments using Masters students at

Beijing University, most of whom had taken at least one course in
economics or business. Due to the economic conditions in China,
the investigators were able to offer subjects very large rewards. In
the high payoff condition, subjects earned about three times their
normal monthly income in the course of one experimental session!
On each trial, subjects were presented with a simple bet that offered
a specified probability to win a given prize, and nothing otherwise.
Subjects were instructed to state their cash equivalent for each bet.
An incentive compatible procedure (the BDM scheme) was used to
determine, on each trial, whether the subject would play the bet or
receive the "official" selling price. If departures from the standard
theory are due to the mental cost associated with decision making
and the absence of proper incentives, as suggested by Smith and
Walker (1992), then the highly paid Chinese subjects should not
exhibit the characteristic nonlinearity observed in hypothetical
choices, or in choices with small payoffs. However, the main finding
of Kachelmeier and Shehata (1991) is massive risk seeking for
small probabilities. Risk seeking was slightly more pronounced for
lower payoffs, but even in the highest payoff condition, the cash
equivalent for a 5% bet (their lowest probability level) was, on
average, three times larger than its expected value. Note that in the
present study the median cash equivalent of a 5% chance to win
$100 (see table 3) was $14, almost three times the expected value
of the bet. In general, the cash equivalents obtained by Kachelmeier
and Shehata were higher than those observed in the present study.
This is consistent with the finding that minimal selling prices are
generally higher than certainty equivalents derived from choice
(see, e.g., Tversky, Slovic, and Kahneman, 1990). As a
consequence, they found little risk aversion for moderate and high
probability of winning. This was true for the Chinese subjects, at
both high and low payoffs, as well as for Canadian subjects, who
either played for low stakes or did not receive any payoff. The most
striking result in all groups was the marked overweighting of small
probabilities, in accord with the present analysis. Evidently, high
incentives do not always dominate noneconomic considerations,
and the observed departures from expected utility theory cannot be
rationalized in terms of the cost of thinking. We agree with Smith
and Walker (1992) that monetary incentives could improve
performance under certain conditions by eliminating careless
errors. However, we maintain that monetary incentives are neither
necessary nor sufficient to ensure subjects' cooperativeness,
thoughtfulness, or truthfulness. The similarity between the results
obtained with and without monetary incentives in choice between
simple prospects provides no special reason for skepticism about
experiments without contingent payment.

Amos Tversky/Daniel Kahneman

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3. DISCUSSION
Theories of choice under uncertainty commonly specify 1) the
objects of choice, 2) a valuation rule, and 3) the characteristics of
the functions that map uncertain events and possible outcomes into
their subjective counterparts. In standard applications of expected
utility theory, the objects of choice are probability distributions over
wealth, the valuation rule is expected utility, and utility is a concave
function of wealth. The empirical evidence reported here and
elsewhere requires major revisions of all three elements. We have
proposed an alternative descriptive theory in which 1) the objects of
choice are prospects framed in terms of gains and losses, 2) the
valuation rule is a two-part cumulative functional, and 3) the value
function is S-shaped and the weighting functions are inverse S-
shaped. The experimental findings confirmed the qualitative
properties of these scales, which can be approximated by a (two-
part) power value function and by identical weighting functions for
gains and losses. The curvature of the weighting function explains
the characteristic reflection pattern of attitudes to risky prospects.
Overweighting of small probabilities contributes to the popularity of
both lotteries and insurance. Underweighting of high probabilities
contributes
both to the prevalence of risk aversion in choices between probable
gains and sure things, and to the prevalence of risk seeking in
choices between probable and sure losses. Risk aversion for gains
and risk seeking for losses are further enhanced by the curvature
of the value function in the two domains. The pronounced
asymmetry of the value function, which we have labeled loss
aversion, explains the extreme reluctance to accept mixed
prospects. The shape of the weighting function explains the
certainty effect and
violations of quasi-convexity. It also explains why these phenomena
are most readily observed at the two ends of the probability scale,
where the curvature of the weighting function is most pronounced
(Camerer, 1992). The new demonstrations of the common
consequence effect, described in tables 1 and 2, show that choice
under uncertainty exhibits some of the main characteristics
observed in choice under risk. On the other hand, there are
indications that the decision weights associated with uncertain and
with risky prospects differ in important ways. First, there is abundant
evidence that subjective judgments of probability do not conform to
the rules of probability theory (Kahneman, Slovic and Tversky,
1982). Second, Ellsberg's example and more recent studies of
choice under uncertainty indicate that people prefer some sources
of uncertainty over others. For example, Heath and Tversky (1991)
found that individuals consistently preferred bets on uncertain
events in their area of expertise over matched bets on chance
devices, although the former are ambiguous and the latter are not.
The presence of systematic preferences for some sources of
uncertainty calls for different weighting functions for different
domains, and suggests that some of these

Amos Tversky/Daniel Kahneman

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functions lie entirely above others. The investigation of decision

weights for uncertain events emerges as a promising domain for
future research. The present theory retains the major features of
the original version of prospect theory and introduces a (two-part)
cumulative functional, which provides a convenient mathematical

Amos Tversky/Daniel Kahneman

representation of decision weights. It also relaxes some descriptively inappropriate constraints of expected utility theory. Despite its
greater generality, the cumulative functional is unlikely to be accurate in detail. We suspect that decision weights may be sensitive to
the formulation of the prospects, as well as to the number, the spacing and the level of outcomes. In particular, there is some evidence
to suggest that the curvature of the weighting function is more pronounced when the outcomes are widely spaced (Camerer, 1992).
The present theory can be generalized to accommodate such effects, but it is questionable whether the gain in descriptive validity,
achieved by giving up the separability of values and weights, would justify the loss of predictive power and the cost of increased
complexity. Theories of choice are at best approximate and incomplete. One reason for this pessimistic assessment is that choice is a
constructive and contingent process. When faced with a complex problem, people employ a variety of heuristic procedures in order to
simplify the representation and the evaluation of prospects. These procedures include computational shortcuts and editing operations,
such as eliminating common components and discarding nonessential differences (Tversky, 1969). The heuristics of choice do not
readily lend themselves to formal analysis because their application depends on the formulation of the problem, the method of
elicitation, and the context of choice. Prospect theory departs from the tradition that assumes the rationality of economic agents; it is
proposed as a descriptive, not a normative, theory. The idealized assumption of rationality in economic theory is commonly justified on
two grounds: the conviction
that only rational behavior can survive in a competitive environment, and the fear that any treatment that abandons rationality will be
chaotic and intractable. Both arguments are questionable. First, the evidence indicates that people can spend a lifetime in a competitive
environment without acquiring a general ability to avoid framing effects or to apply linear decision weights. Second, and perhaps more
important, the evidence indicates that human choices are orderly, although not always rational in the traditional sense of this word.
APPENDIX: AXIOMATIC ANALYSIS

THEOREM 1. Suppose (F + , ~> ) and (F-, > ) can each be

represented by a cumulative

functional. Then (F, ~> ) satisfies cumulative prospect theory iff it

satisfies double
matching and comonotonic independence.

THEOREM 2. Assume the structural conditions described

above.

a. (Wakker, 1989a) Expected utility theory holds iff ~> satisfies TC.

b. (Wakker, 1989b) Cumulative utility theory holds iff > satisfies

CTC.
c. Cumulative prospect theory holds iff ~> satisfies double matching
and SCTC.
𝑣(𝑥{𝑠}𝑓) = 𝜋𝑠 𝑣(𝑥) + ∑ 𝜋𝑟 𝑣(𝑓(𝑟))
𝑛𝑆−𝑠