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A simple derivation of Prelec’s probability weighting function

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  • Ali al-Nowaihi

    ()

  • Sanjit Dhami

    ()

Abstract

Since Kahneman and Tversky (1979), it has been generally recognized that decision makers overweight low probabilities and underweight high probabilities. Of the several weighting functions that have been proposed, that of Prelec (1998) has the attractions that it is parsimonious, consistent with much of the available empirical evidence and has an axiomatic foundation. Luce (2001) provided a simpler derivation based on reduction invariance, rather than compound invariance of Prelec (1998). This note gives a simpler form of reduction invariance, which we call power invariance. A more direct derivation of Prelec’s function is given, achieving a further simplification.

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Bibliographic Info

Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 05/20.

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Date of creation: Jul 2005
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Handle: RePEc:lec:leecon:05/20

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Related research

Keywords: Decision making under risk; Prelec’s probability weighting function; Compound invariance; Reduction invariance; Power invariance; Prospect theory; Algebraic functional equations;

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Cited by:
  1. Ali al-Nowaihi & Sanjit Dhami, 2013. "A Theory of Reference Time," Discussion Papers in Economics 13/26, Department of Economics, University of Leicester.

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