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Unusual Estimates of Probability Weighting Functions

Nathaniel T. Wilcox (Appalachian State University, USA)

Models of Risk Preferences: Descriptive and Normative Challenges

ISBN: 978-1-83797-269-2, eISBN: 978-1-83797-268-5

Publication date: 23 October 2023

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

Acknowledgements

Acknowledgments

I have benefited from conversations with Pavlo Blavatskyy, Jerome Busemeyer, Chew Soo Hong, Jim Cox, Glenn Harrison, John Hey, Stefan Hoderlein, Jonathan Leland, Graham Loomes, Mark Machina, John Quiggin, Michel Regenwetter, Joerg Stoye, and an anonymous referee. I thank Stacey Joldersma for her excellent research assistance. This work was financially supported by the University of Houston and Chapman University.

Citation

Wilcox, N.T. (2023), "Unusual Estimates of Probability Weighting Functions", Harrison, G.W. and Ross, D. (Ed.) Models of Risk Preferences: Descriptive and Normative Challenges (Research in Experimental Economics, Vol. 22), Emerald Publishing Limited, Leeds, pp. 69-106. https://doi.org/10.1108/S0193-230620230000022002

Publisher

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Emerald Publishing Limited

Copyright © 2023 Nathaniel T. Wilcox