Evaluating probability weighting among lottery bond investors: an observational study on Cumulative Prospect Theory

Sammanfattning: Cumulative Prospect Theory is a leading descriptive theory of decisions under uncertainty, backed up by a plethora of experimental evidence. This paper is one of the first to apply it to observational data. Risk attitudes in the bond market have not been studied in a CPT framework. We fill this research gap. By using maximum likelihood estimation, CPT parameters are estimated for the Swedish lottery bond market. We find drastic probability weighting that opposes linearity in probabilities espoused by Expected Utility Theory.