Nonlinear Decision Weights in Choice Under Uncertainty
AbstractIn most real-world decisions, consequences are tied explicitly to the outcome of events. Previous studies of decision making under uncertainty have indicated that the psychological weight attached to an event, called a decision weight, usually differs from the probability of that event. We investigate two sources of nonlinearity of decision weights: subadditivity of probability judgments, and the overweighting of small probabilities and underweighting of medium and large probabilities. These two sources of nonlinearity are combined into a two-stage model of choice under uncertainty. In the first stage, events are taken into subjective probability judgments, and the second stage takes probability judgments into decision weights. We then characterize the curvature of the decision weights by extending a condition employed by Wu and Gonzalez (1996) in the domain of risk to the domain of uncertainty and show that the nonlinearity of decision weights can be decomposed into subadditivity of probability judgments and the curvature of the probability weighting function. Empirical tests support the proposed two-stage model and indicate that decision weights are concave then convex. More specifically, our results lend support for a new property of subjective probability judgments, interior additivity (subadditive at the boundaries, but additive away from the boundaries), and show that the probability weighting function is inverse S-shaped as in Wu and Gonzalez (1996).
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 45 (1999)
Issue (Month): 1 (January)
decision making under uncertainty; prospect theory; decision weights; support theory;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.