Unusual Estimates of Probability Weighting Functions

Nathaniel Wilcox

A chapter in Models of Risk Preferences: Descriptive and Normative Challenges, 2023, vol. 22, pp 69-106 from Emerald Group Publishing Limited

Abstract: The author presents new estimates of the probability weighting functions found in rank-dependent theories of choice under risk. These estimates are unusual in two senses. First, they are free of functional form assumptions about both utility and weighting functions, and they are entirely based on binary discrete choices and not on matching or valuation tasks, though they depend on assumptions concerning the nature of probabilistic choice under risk. Second, estimated weighting functions contradict widely held priors of an inverse-s shape with fixed point well in the interior of the (0,1) interval: Instead the author usually finds populations dominated by “optimists” who uniformly overweight best outcomes in risky options. The choice pairs used here mostly do not provoke similarity-based simplifications. In a third experiment, the author shows that the presence of choice pairs that provoke similarity-based computational shortcuts does indeed flatten estimated probability weighting functions.

Keywords: Prospect theory; probability weighting; probabilistic choice; rank-dependent utility; risk; similarity (search for similar items in EconPapers)
Date: 2023
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Working Paper: Unusual Estimates of Probability Weighting Functions (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rexezz:s0193-230620230000022002

DOI: 10.1108/S0193-230620230000022002

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