Using Preferred Outcome Distributions to Estimate Value and Probability Weighting Functions in Decisions under Risk
AbstractIn this paper we propose the use of preferred outcome distributions as a new method to elicit individualsâ€™ value and probability weighting functions in decisions under risk. Extant approaches for the elicitation of these two key ingredients of individualsâ€™ risk attitude typically rely on a long, chained sequence of lottery choices. In contrast, preferred outcome distributions can be elicited through an intuitive graphical interface, and, as we show, the information contained in two preferred outcome distributions is sufficient to identify non-parametrically both the value function and the probability weighting function in rank-dependent utility models. To illustrate our method and its advantages, we run an incentive-compatible lab study in which participants use a simple graphical interface â€“ the Distribution Builder (Goldstein et al. 2008) â€“ to construct their preferred outcome distributions, subject to a budget constraint. Results show that estimates of the value function are in line with previous research but that probability weighting biases are diminished, thus favoring our proposed approach based on preferred outcome distributions.
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Bibliographic InfoPaper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2013-005-MKT.
Date of creation: 08 May 2013
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decision making; rank dependent utility; risk preference; distribution builder; micro economics; preference elicitation;
Other versions of this item:
- Bas Donkers & Carlos J.S. Lourenco & Benedict G.C. Dellaert & Daniel G. Goldstein, 2013. "Using Preferred Outcome Distributions to estimate Value and Probability Weighting Functions in Decisions under Risk," Tinbergen Institute Discussion Papers 13-065/VII, Tinbergen Institute.
- G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- M39 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-24 (All new papers)
- NEP-CDM-2013-05-24 (Collective Decision-Making)
- NEP-EXP-2013-05-24 (Experimental Economics)
- NEP-UPT-2013-05-24 (Utility Models & Prospect Theory)
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