Risk and Rationality:The Relative Importance of Probability Weighting and Choice Set Dependence

Adrian Bruhin, Maha Manai and Luis Santos-Pinto ()

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: The literature suggests that probability weighting and choice set dependence influence risky choices. However, their relative importance has not been tested jointly.We present a joint test that uses binary choices between lotteries provoking Common Consequence and Common Ratio Allais Paradoxes and manipulates their correlation structure. 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 typespecific dierences in the frequency of preference reversals out-of-sample. 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 (search for similar items in EconPapers)
JEL-codes: C49 C91 D81 (search for similar items in EconPapers)
Pages: 115 pp.
Date: 2019-08
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://www.unil.ch/de/files/live/sites/de/files/working-papers/19.05.pdf (application/pdf)

Related works:
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:lau:crdeep:19.05

Access Statistics for this paper

More papers in Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie Université de Lausanne, Faculté des HEC, Département d’économie, Internef, CH-1015 Lausanne. Contact information at EDIRC.
Bibliographic data for series maintained by Michèle Jaccoud Ramseier ( this e-mail address is bad, please contact ).