EconPapers    
Economics at your fingertips  
 

Foundations of the Rank-Dependent Probability Weighting Function

Matthew Rablen ()

No 12701, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The psychological basis for rank-dependent probability weighting, and for an inverse-S probability weighting function (PWF) in particular, has often been questioned. I examine the existence and shape of the PWF in a model allowing for optimism/pessimism over probability distributions and for loss averse/gain loving stochastic reference dependence. I give commonly observed shapes of PWF a psychological interpretation. In particular, I establish a deep connection between two of the most established phenomena in decisionmaking: loss aversion and the inverse-S PWF: the former is a pre- condition for the latter.

Keywords: probability weighting; rank dependent expected utility; loss aversion; reference dependence; optimism; pessimism (search for similar items in EconPapers)
JEL-codes: D01 D81 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2019-10
New Economics Papers: this item is included in nep-cbe, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://ftp.iza.org/dp12701.pdf (application/pdf)

Related works:
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:iza:izadps:dp12701

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().

 
Page updated 2021-07-26
Handle: RePEc:iza:izadps:dp12701