What Determines the Shape of the Probability Weighting Function?
AbstractWhen valuing risky prospects, people typically overweight small probabilities and underweight medium and large probabilities, but there is vast heterogeneity in individual behavior. We explore the relationship between person-specific probability weights, estimated from investment decisions in a laboratory experiment, and personal characteristics. We find considerable interaction effects with gender. While women’s probability weighting is strongly and significantly susceptible to mood states, men’s is not. Moreover, we show that cheerful and optimistic people weight probabilities of investment gains more favorably than do pessimistic people. People who calculate expected payoffs are less prone to probability distortions than those who do not use a lottery’s expected value as a decision criterion. None of the factors studied impact subjects’ valuations of monetary outcomes.
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 InfoPaper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 06/54.
Length: 41 pages
Date of creation: Aug 2006
Date of revision:
Probability Weighting Function; Prospect Theory; Risk Aversion; Gender Differences;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-11 (All new papers)
- NEP-EXP-2006-09-11 (Experimental Economics)
- NEP-FMK-2006-09-11 (Financial Markets)
- NEP-UPT-2006-09-11 (Utility Models & Prospect Theory)
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.:
- Kliger, Doron & Levy, Ori, 2003. "Mood-induced variation in risk preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 52(4), pages 573-584, December.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 263-91, March.
- Walther, Herbert, 2003. "Normal-randomness expected utility, time preference and emotional distortions," Journal of Economic Behavior & Organization, Elsevier, vol. 52(2), pages 253-266, October.
- Eckel, Catherine C. & Grossman, Philip J., 2008. "Differences in the Economic Decisions of Men and Women: Experimental Evidence," Handbook of Experimental Economics Results, Elsevier, Elsevier.
- Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, Springer, vol. 5(4), pages 297-323, October.
- George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, INFORMS, vol. 42(12), pages 1676-1690, December.
- Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
- 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.
- Nathalie Etchart-Vincent, 2004. "Is Probability Weighting Sensitive to the Magnitude of Consequences? An Experimental Investigation on Losses," Journal of Risk and Uncertainty, Springer, Springer, vol. 28(3), pages 217-235, 05.
- 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.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:CitEc Project, subscribe to its RSS feed for this item.
- Harin, Alexander, 2007. "Principle of uncertain future and utility," MPRA Paper 1959, University Library of Munich, Germany.
- Galarza, Francisco B., 2009.
"Choices under Risk in Rural Peru,"
Staff Paper Series
542, University of Wisconsin, Agricultural and Applied Economics.
- Alexander Harin, 2006. "Principle of Uncertain Future," Microeconomics, Socionet harin_alexander.34115-061, Socionet.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.