Psychophysics of the probability weighting function

Taiki Takahashi

Physica A: Statistical Mechanics and its Applications, 2011, vol. 390, issue 5, 902-905

Abstract: A probability weighting function w(p) for an objective probability p in decision under risk plays a pivotal role in Kahneman–Tversky prospect theory. Although recent studies in econophysics and neuroeconomics widely utilized probability weighting functions, psychophysical foundations of the probability weighting functions have been unknown. Notably, a behavioral economist Prelec (1998) [4] axiomatically derived the probability weighting function w(p)=exp(−(−lnp)α) (0<α<1 and w(0)=1,w(1e)=1e,w(1)=1), which has extensively been studied in behavioral neuroeconomics. The present study utilizes psychophysical theory to derive Prelec’s probability weighting function from psychophysical laws of perceived waiting time in probabilistic choices. Also, the relations between the parameters in the probability weighting function and the probability discounting function in behavioral psychology are derived. Future directions in the application of the psychophysical theory of the probability weighting function in econophysics and neuroeconomics are discussed.

Keywords: Neuroeconomics; Econophysics; Uncertainty; Prospect theory; Decision-making; Tsallis statistics (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:390:y:2011:i:5:p:902-905

DOI: 10.1016/j.physa.2010.10.004

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