Mixed Strategy Equilibrium for Agents with Cumulative Prospect Theory Preferences

Abstract

Relying on the experimental findings that actual choice behavior often violates the axioms of expected utility theory (EUT), we study non-EUT preferences in a non-cooperative game-theoretic framework. In particular, agents' preferences are represented by the pair of functions suggested in cumulative prospect theory (CPT). Accordingly, three key aspects of CPT are incorporated: subjective probability weighting, loss aversion, and reference dependence. We present two types of mixed strategy equilibrium for agents with CPT preferences and prove the existence of these equilibria for finite normal form games.