Risk and rationality: The relative importance of probability weighting and choice set dependence

Adrian Bruhin (), Maha Manai and Luis Santos-Pinto ()
Additional contact information
Adrian Bruhin: University of Lausanne
Maha Manai: University of Lausanne

Journal of Risk and Uncertainty, 2022, vol. 65, issue 2, No 2, 139-184

Abstract: Abstract The literature suggests that probability weighting and choice set dependence influence risky choices. However, their relative importance remains an open question. We present a joint test that uses binary choices between lotteries provoking Common Consequence and Common Ratio Allais Paradoxes and manipulates their joint payoff distribution. We show non-parametrically that probability weighting and choice set dependence both play a role at describing aggregate choices. To parsimoniously account for heterogeneity, we also estimate a structural model using a finite mixture approach. The model uncovers substantial heterogeneity and classifies subjects into three types: 38% Prospect Theory types whose choices are predominantly driven by probability weighting, 34% Salience Theory types whose choices are predominantly driven by choice set dependence, and 28% Expected Utility Theory types. The model predicts type-specific differences in the frequency of preference reversals out-of-sample, i.e., in choices with a different context than the ones used for estimating the model. Moreover, the out-of-sample predictions indicate that the choice context shapes the influence of choice set dependence.

Keywords: Choice under risk; Choice set dependence; Probability weighting; Salience theory; Prospect theory; Preference reversals; D81; C91; C49 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s11166-022-09392-x Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Risk and Rationality:The Relative Importance of Probability Weighting and Choice Set Dependence (2019)
Working Paper: Risk and Rationality:The Relative Importance of Probability Weighting and Choice Set Dependence (2018)
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:kap:jrisku:v:65:y:2022:i:2:d:10.1007_s11166-022-09392-x

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/11166/PS2

DOI: 10.1007/s11166-022-09392-x

Access Statistics for this article

Journal of Risk and Uncertainty is currently edited by W. Kip Viscusi

More articles in Journal of Risk and Uncertainty from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().