Distinguishing Probability Weighting from Risk Misperceptions in Field Data
Ted O'Donoghue and
American Economic Review, 2013, vol. 103, issue 3, 580-85
We outline a strategy for distinguishing rank-dependent probability weighting from systematic risk misperceptions in field data. Our strategy relies on singling out a field environment with two key properties: (i) the objects of choice are money lotteries with more than two outcomes; and (ii) the ranking of outcomes differs across lotteries. We first present an abstract model of risky choice that elucidates the identification problem and our strategy. The model has numerous applications, including insurance choices and gambling. We then consider the application of insurance deductible choices and illustrate our strategy using simulated data.
JEL-codes: C93 D81 (search for similar items in EconPapers)
Note: DOI: 10.1257/aer.103.3.580
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Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:103:y:2013:i:3:p:580-85
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