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Choice-Based Elicitation and Decomposition of Decision Weights for Gains and Losses Under Uncertainty

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Author Info
Abdellaoui, Mohammed
Vossman, Frank
Weber, Martin
Abstract

This Paper reports the results of an experimental parameter-free elicitation and decomposition of decision weights under uncertainty. Assuming cumulative prospect theory, utility functions were elicited for gains and losses at an individual level using the trade-off method. Then decision weights were elicited using certainty equivalents of uncertain two-outcome prospects. Furthermore, decision weights were decomposed using observable choice instead of invoking other empirical primitives as in the previous experimental studies. The choice-based elicitation of decision weights allows for a quantitative study of their characteristics, and also allows, among other things, to confront the sign-dependence hypothesis with observed choice under uncertainty. Our results confirm concavity of the utility function in the gain domain and bounded sub-additivity of decision weights as well as choice-based subjective probabilities. We also find evidence of sign-dependence of decision weights.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3756.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3756

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Related research
Keywords: choquet expected utility; cumulative prospect theory; decision under uncertainty (ambiguity); decision weights; probability weighting; subjective probabilities;

Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

This paper has been announced in the following NEP Reports:

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lattimore, Pamela K. & Baker, Joanna R. & Witte, Ann D., 1992. "The influence of probability on risky choice: A parametric examination," Journal of Economic Behavior & Organization, Elsevier, vol. 17(3), pages 377-400, May. [Downloadable!] (restricted)
  2. Wakker, Peter P, 2001. "Testing and Characterizing Properties of Nonadditive Measures through Violations of the Sure-Thing Principle," Econometrica, Econometric Society, vol. 69(4), pages 1039-59, July.
  3. Tversky, Amos & Wakker, Peter, 1995. "Risk Attitudes and Decision Weights," Econometrica, Econometric Society, vol. 63(6), pages 1255-80, November. [Downloadable!] (restricted)
  4. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
  5. Heath, Chip & Tversky, Amos, 1991. " Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 5-28, January.
  6. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  7. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  8. Pamela K. Lattimore & Joanna R. Baker & A. Dryden Witte, 1992. "The Influence Of Probability on Risky Choice: A parametric Examination," NBER Technical Working Papers 0081, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 16(1), pages 65-88, February. [Downloadable!] (restricted)
  10. Fox, Craig R & Rogers, Brett A & Tversky, Amos, 1996. "Options Traders Exhibit Subadditive Decision Weights," Journal of Risk and Uncertainty, Springer, vol. 13(1), pages 5-17, July.
  11. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May. [Downloadable!] (restricted)
  12. Wakker, Peter & Tversky, Amos, 1993. " An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 147-75, October.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rieger, Marc Oliver & Wang, Mei, 2004. "Cumulative Prospect Theory and the St.Petersburg Paradox," Sonderforschungsbereich 504 Publications 04-28, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  2. Henry Stott, 2006. "Cumulative prospect theory's functional menagerie," Journal of Risk and Uncertainty, Springer, vol. 32(2), pages 101-130, March. [Downloadable!] (restricted)
  3. Ulrich Schmidt & Horst Zank, 2005. "What is Loss Aversion?," Journal of Risk and Uncertainty, Springer, vol. 30(2), pages 157-167, January. [Downloadable!] (restricted)
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