What Determines the Shape of the Probability Weighting Function under Uncertainty?

Michael Kilka and Martin Weber
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Michael Kilka: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim

No 98-11, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: Decision weights are an important component in recent theories for decision making under uncertainty. To better explain these decision weights, a two stage approach has been proposed: first, the probability of an event is judged and then this probability is transformed by the probability weighting function known from decision making under risk. We extend the two stage approach by allowing the probability weighting function to depend on the type of uncertainty. Using this more general approach, certain properties of decision weights can be attributed to certain properties of probability judgments and/or to certain properties of probability weighting. After deriving these relations between decision weights, probability judgments and probability weighting under uncertainty, we present an empirical study which shows that it is indeed neccessary to allow the probability weighting function to be source dependent. The analysis includes an examination of properties of the probability weighting function under uncertainty which have not been considered yet.

Pages: 31 pages
Date: 1998-07-20
New Economics Papers: this item is included in nep-exp, nep-mic and nep-pke
Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Journal Article: What Determines the Shape of the Probability Weighting Function Under Uncertainty? (2001)
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