Expected utility without linearity: distinguishing between prospect theory and cumulative prospect theory

Abstract We reconsider the foundations of expected utility without assuming the linearity of the independence axiom. We consider a decision-maker who cancels out common outcomes when comparing a pair of lotteries with the same probability tree. We show that if the decision-maker is consistent with first-order stochastic dominance or topological continuity in weak convergence, then the decision-maker is an expected utility maximizer. First, this offers a simple method to differentiate behavior between prospect theory, canceling out common outcomes, and cumulative prospect theory, satisfying first-order stochastic dominance. Second, this offers a novel method to test technical continuity assumptions based on their behavioral content.