Abstract: By introducing cumulative prospect theory,the compensation contract is reconstructed in this paper.It is proved by empirical and experimental researches that the risk decision behaviors of principal and agent are not in accord with expected utility theory but cumulative prospect theory By constructing the value function and decision weighting function,the reference point is set and the decision behavior is studied in the condition that the agents and pricipals are all have no obvious risk preference. Using continuous cumulative prospect theory, it is conchuded that when agent's reference point is 0, the optimal effort level is irrelevant to his own risk attitude coefficient or decision weight coefficient, and the optimal profit sharing coefficient made by the principal is completely decided by his risk attitude coefficient and decision weight coefficient. Consequently, series of countermeasures to optimize the incentive mechanism are proposed at the end.

Key words: compensation contract, cumulative prospect theory, risk preference, value function, decision weight