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.