The Temporal Discounting With Third-Generation Prospect Theory And Its Application In Dynamic Investment Decisions

Temporal discounting is the psychological phenomenon that the value of events is discounted when the temporal distance between the consequence of the event and its occurrence increases. It is an important part of the behavioral choice theory. It is also helpful to understand how bounded rational human makes rational and reasonable decision without possessing all the indispensable information. The researches about investment decision are always based on the traditional uncertainty decision theory. One of the most important hypotheses of traditional uncertainty decision theory is fully person. However, increasingly experimental have been conducted to show that people’s decisions always violate the outcomes obtained from Expected Utility Theory. Accordingly, Prospect Theory was proposed in response to those experimental challenges and provides a good descriptive model of individual behavior under risk and uncertainty.The thesis studies the basic theories of temporal discounting, dynamic investment decision and prospect theory. It mainly includes the development of temporal discounting theory and prospect theory. Then, a detail discussion for the temporal discounting is given which contains utility function and discount function. And a comparison of temporal discounting and probability is focused on in this part. We also improve the original probability-time discounting model. Then, the third-generation prospect theory is talked about in detail. The difference between the third-generation prospect theory and other versions of prospect theory is stated. In this part, we extend the model of third-generation prospect theory under multi-attribute condition, which forms the additive utility function in third-generation prospect theory. In addition, we also extend the third-generation prospect theory under temporal discounting condition, which forms the model of third-generation prospect theory considering temporal discounting. The improved probability-time discounting model is extended based on the third-generation prospect theory. At last, this thesis also applies the extended third-generation prospect theory model into dynamic investment decision. According to the analysis of the calculation results, we obtain the optimal results of the dynamic investment decision based on the temporal discounting with third-generation prospect theory.