Using Preferred Outcome Distributions to estimate Value and Probability Weighting Functions in Decisions under Risk

Bas Donkers, Carlos J.S. Lourenco, Benedict Dellaert and Daniel Goldstein
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Carlos J.S. Lourenco: Erasmus University Rotterdam

No 13-065/VII, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: In this paper we propose the use of preferred outcome distributions as a new method to elicit individuals' value and probability weighting functions in decisions under risk. Extant approaches for the elicitation of these two key ingredients of individuals' risk attitude typically rely on a long, chained sequence of lottery choices. In contrast, preferred outcome distributions can be elicited through an intuitive graphical interface, and, as we show, the information contained in two preferred outcome distributions is sufficient to identify non-parametrically both the value function and the probability weighting function in rank-dependent utility models. To illustrate our method and its advantages, we run an incentive-compatible lab study in which participants use a simple graphical interface - the Distribution Builder (Goldstein et al. 2008) - to construct their preferred outcome distributions, subject to a budget constraint. Results show that estimates of the value function are in line with previous research but that probability weighting biases are diminished, thus favoring our proposed approach based on preferred outcome distributions.

Keywords: Decision making; risk preference; distribution builder; rank dependent utility; preference elicitation; micro economics (search for similar items in EconPapers)
JEL-codes: D81 D83 G02 M39 (search for similar items in EconPapers)
Date: 2013-05-08
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Using Preferred Outcome Distributions to Estimate Value and Probability Weighting Functions in Decisions under Risk (2013)
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