Discriminating among probability weighting functions using adaptive design optimization

Daniel Cavagnaro (), Mark Pitt, Richard Gonzalez and Jay Myung

Journal of Risk and Uncertainty, 2013, vol. 47, issue 3, 255-289

Abstract: Probability weighting functions relate objective probabilities and their subjective weights, and play a central role in modeling choices under risk within cumulative prospect theory. While several different parametric forms have been proposed, their qualitative similarities make it challenging to discriminate among them empirically. In this paper, we use both simulation and choice experiments to investigate the extent to which different parametric forms of the probability weighting function can be discriminated using adaptive design optimization, a computer-based methodology that identifies and exploits model differences for the purpose of model discrimination. The simulation experiments show that the correct (data-generating) form can be conclusively discriminated from its competitors. The results of an empirical experiment reveal heterogeneity between participants in terms of the functional form, with two models (Prelec-2, Linear-in-Log-Odds) emerging as the most common best-fitting models. The findings shed light on assumptions underlying these models. Copyright Springer Science+Business Media New York 2013

Keywords: Probability weighting; Experimental design; Active learning; Model discrimination; Prospect theory; C91; C52; D81 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (13)

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DOI: 10.1007/s11166-013-9179-3

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