A Note on the Shape of the Probability Weighting Function

Martina Nardon () and Paolo Pianca ()
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Martina Nardon: Department of Economics, Ca’ Foscari University of Venice
Paolo Pianca: Department of Economics, Ca’ Foscari University of Venice

A chapter in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2018, pp 477-481 from Springer

Abstract: Abstract The focus of this contribution is on the transformation of objective probability, which in Prospect Theory is commonly referred as probability weighting. Empirical evidence suggests a typical inverse-S shaped function: decision makers tend to overweight small probabilities, and underweight medium and high probabilities; moreover, the probability weighting function is initially concave and then convex. We apply different parametric weighting functions proposed in the literature to the evaluation of derivative contracts and to insurance premium principles.

Keywords: Probabilistic risk; Probability weighting function (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-319-89824-7_85

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DOI: 10.1007/978-3-319-89824-7_85

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