Heterogeneity of probability weighting in investment decisions

Yuzhe Sun and Shunming Zhang

Economics Letters, 2023, vol. 228, issue C

Abstract: This study examines how the heterogeneity of elevation or curvature in probability weighting affects investors’ market participation and the equity premium. We analyze the rank-dependent utility with the generalized Wang transform (GWT) as an inverse S-shaped weighting function. The two parameters of GWT elicit pessimism (elevation) and likelihood insensitivity to less extreme probability (curvature). There is non-participation when the heterogeneity of elevation or curvature is significant. The mean of elevation does not affect market participation, but that of curvature does. With elevation dispersion, a GWT weighting function with a single prior is compatible with a maxmin model with multiple priors.

Keywords: Elevation; Curvature; Generalized Wang transform; Market participation; Rank-dependent utility (search for similar items in EconPapers)
JEL-codes: D81 G12 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165176523001817
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:228:y:2023:i:c:s0165176523001817

DOI: 10.1016/j.econlet.2023.111156

Access Statistics for this article

Economics Letters is currently edited by Economics Letters Editorial Office

More articles in Economics Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().