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Parametric Weighting Functions

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Author Info

  • Enrico Diecidue
  • Ulrich Schmidt
  • Horst Zank

Abstract

This paper provides preference foundations for parametric weighting functions under rankdependent utility. This is achieved by decomposing the independence axiom of expected utility into separate meaningful properties. These conditions allow us to characterize rank-dependent utility with power and exponential weighting functions. Moreover, by allowing probabilistic risk attitudes to vary within the probability interval, a preference foundation for rank-dependent utility with parametric inverse-S shaped weighting function is obtained.

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File URL: https://www.ifw-members.ifw-kiel.de/publications/parametric-weighting-functions/kap1395.pdf
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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1395.

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Length: 33 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:kie:kieliw:1395

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Keywords: Comonotonic independence; probability weighting function; preference foundation; rank-dependent utility;

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References

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Citations

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Cited by:
  1. Nathalie Etchart-Vincent, 2009. "Probability weighting and the 'level' and 'spacing' of outcomes: An experimental study over losses," Post-Print, HAL hal-00395876, HAL.
  2. Nicolas Drouhin, 2012. "A rank-dependent utility model of uncertain lifetime, time consistency and life insurance," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00748662, HAL.
  3. Peter Brooks & Simon Peters & Horst Zank, 2014. "Risk behavior for gain, loss, and mixed prospects," Theory and Decision, Springer, Springer, vol. 77(2), pages 153-182, August.
  4. Aurélien Baillon & Han Bleichrodt & Umut Keskin & Olivier L'Haridon & Author-Name: Chen Li, 2013. "Learning under ambiguity: An experiment using initial public offerings on a stock market," Economics Working Paper Archive (University of Rennes 1 & University of Caen), Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS 201331, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  5. Webb, Craig S. & Zank, Horst, 2011. "Accounting for optimism and pessimism in expected utility," Journal of Mathematical Economics, Elsevier, vol. 47(6), pages 706-717.
  6. Horst Zank, 2010. "Consistent probability attitudes," Economic Theory, Springer, Springer, vol. 44(2), pages 167-185, August.
  7. Mohammed Abdellaoui & Olivier L’Haridon & Horst Zank, 2010. "Separating curvature and elevation: A parametric probability weighting function," Journal of Risk and Uncertainty, Springer, Springer, vol. 41(1), pages 39-65, August.
  8. repec:hal:wpaper:halshs-00748662 is not listed on IDEAS
  9. Kaluszka, Marek & Krzeszowiec, Michał, 2012. "Pricing insurance contracts under Cumulative Prospect Theory," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 159-166.
  10. Martina Nardon & Paolo Pianca, 2012. "Prospect theory: An application to European option pricing," Working Papers 2012:34, Department of Economics, University of Venice "Ca' Foscari".
  11. Daniel Cavagnaro & Mark Pitt & Richard Gonzalez & Jay Myung, 2013. "Discriminating among probability weighting functions using adaptive design optimization," Journal of Risk and Uncertainty, Springer, Springer, vol. 47(3), pages 255-289, December.

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