Experienced vs. Described Uncertainty: Do We Need Two Prospect Theory Specifications?

Mohammed Abdellaoui, Olivier L'Haridon and Corina Paraschiv ()
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Corina Paraschiv: Université Paris Descartes, 75016 Paris, France; and GREGHEC, 78351 Jouy en Josas, France

Management Science, 2011, vol. 57, issue 10, 1879-1895

Abstract: This paper reports on the results of an experimental elicitation at the individual level of all prospect theory components (i.e., utility, loss aversion, and weighting functions) in two decision contexts: situations where alternatives are described as probability distributions and situations where the decision maker must experience unknown probability distributions through sampling before choice. For description-based decisions, our results are fully consistent with prospect theory's empirical findings under risk. Furthermore, no significant differences are detected across contexts as regards utility and loss aversion. Whereas decision weights exhibit similar qualitative properties across contexts typically found under prospect theory, our data suggest that, for gains at least, the subjective treatment of uncertainty in experience-based and description-based decisions is significantly different. More specifically, we observe a less pronounced overweighting of small probabilities and a more pronounced underweighting of moderate and high probabilities for experience-based decisions. On the contrary, for losses, no significant differences were observed in the evaluation of prospects across contexts. This paper was accepted by George Wu, decision analysis.

Keywords: experience-based decisions; description-based decisions; rare events; risk; uncertainty; prospect theory; utility; loss aversion; decision weights; probability weighting; source of uncertainty; ambiguity (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (56)

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http://dx.doi.org/10.1287/mnsc.1110.1368 (application/pdf)

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Working Paper: Experienced vs. Described Uncertainty: Do We Need Two Prospect Theory Specifications? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:57:y:2011:i:10:p:1879-1895

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