Approximating Prospect Theory's Value Function with a Bayesian Utility

LiCalzi and Castagnoli's seminal paper inspired both target-oriented utility and maximum entropy utility. Unlike prospect theory, their model is a normative model of behavior. Since organizational targets often unexpectedly change, this paper derives a target-oriented maximum entropy utility. Like prospect theory, this model is reference dependent with diminishing sensi- tivity to losses and gains. While uncertainty is described by Bayesian probabilities, the certainty equivalent — consistent with prospect theory — is an inverse S-shaped function of Bayesian probabilities.