  This paper initiates a discussion of mechanism design when the participating
agents exhibit preferences that deviate from expected utility theory (EUT). In
particular, we consider mechanism design for systems where the agents are
modeled as having cumulative prospect theory (CPT) preferences, which is a
generalization of EUT preferences. We point out some of the key modifications
needed in the theory of mechanism design that arise from agents having CPT
preferences and some of the shortcomings of the classical mechanism design
framework. In particular, we show that the revelation principle, which has
traditionally played a fundamental role in mechanism design, does not continue
to hold under CPT. We develop an appropriate framework that we call mediated
mechanism design which allows us to recover the revelation principle for CPT
agents. We conclude with some interesting directions for future work.
