Probability weighting and loss aversion: Patterns and paradoxes

Charles A. Holt

Chapter 3 in The Origins and Evolution of Experimental Economics, 2026, pp 35-46 from Edward Elgar Publishing

Abstract: Risk preferences can be context-specific due to probability weighting. Bipolar risk preference can occur if a person overperceives a small probability of a very low payoff, which manifests as risk aversion. The same person can overperceive a small probability of a very high payoff, which manifests as risk preference. Probability-weighting biases have large effects when two probabilities are not close in magnitude, which can cause an Allais paradox reversal of preferences. Probability weighting can also interfere with the interpretation of lab experiments in which random termination is used to induce discounting of future earnings.

Keywords: Prospect Theory; Loss Aversion; Probability Weighting; Bipolar Risk Preference (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035356256
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