A simple derivation of Prelec’s probability weighting function

Ali al-Nowaihi () and Sanjit Dhami

No 05/20, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: Since Kahneman and Tversky (1979), it has been generally recognized that decision makers overweight low probabilities and underweight high probabilities. Of the several weighting functions that have been proposed, that of Prelec (1998) has the attractions that it is parsimonious, consistent with much of the available empirical evidence and has an axiomatic foundation. Luce (2001) provided a simpler derivation based on reduction invariance, rather than compound invariance of Prelec (1998). This note gives a simpler form of reduction invariance, which we call power invariance. A more direct derivation of Prelec’s function is given, achieving a further simplification.

Keywords: Decision making under risk; Prelec’s probability weighting function; Compound invariance; Reduction invariance; Power invariance; Prospect theory; Algebraic functional equations (search for similar items in EconPapers)
JEL-codes: C60 D81 (search for similar items in EconPapers)
Date: 2005-07
New Economics Papers: this item is included in nep-gth and nep-rmg
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