Cumulative Prospect Theory for piecewise continuous distributions

- We develop a piecewise continuous version of the Cumulative Prospect Theory.
- The model is applied to a broad class of outcomes with piecewise continuous distributions.
- As an example, we show how to evaluate guarantee certificates on the basis of the Cumulative Prospect Theory.

We extend the continuous Cumulative Prospect Theory by considering piecewise continuous distributions with a finite number of jump discontinuities. Such distributions are always relevant when outcomes depend on continuously distributed random variables and the dependency is defined by a piecewise continuous function. For example, such outcomes occur within the framework of financial engineering. We show how to apply the model to a broad class of piecewise continuous outcome functions that includes outcomes of guarantee certificates.