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Cambridge Finance Workshop - David Hobson

Cambridge Finance Workshop Series are usually held on Thursdays during term time. The workshops are an opportunity for those working in finance to present their latest results or papers.
When Jan 22, 2015
from 12:30 PM to 01:30 PM
Where Lecture Theatre 3, Cambridge Judge Business School
Contact Name
Contact Phone 01223768129
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Professor David Hobson is a Deputy Head, Department of Statistics, University of Warwick.

Prof Hobson



Randomized Strategies and Prospect Theory in a Dynamic Context


Cumulative prospect theory (CPT) helps explain many features of individuals' attitudes to risk. But, as observed by Barberis (2012), in a dynamic setting the probability weighting of CPT leads to time inconsistency. It also leads to another feature which has not been considered to date - agents may prefer randomized strategies to pure strategies. In this paper we consider the impact of allowing CPT agents to follow randomized strategies.


In the discrete-time, discrete-space model of gambling in a casino of Barberis (2012) we show that allowing randomized strategies leads to significant value gains. In a continuous-time, continuous-space model of Ebert and Strack (2014) we show that allowing randomization can significantly change the predictions of the model. Ebert and Strack show that a naive investor with CPT preferences never chooses to stop and gambles until the bitter end. We show that this extreme conclusion is no longer valid if the agent has a coin in his pocket.


This is joint work with Vicky Henderson and Alex Tse (Warwick)

Paper and Abstract on SSRN






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