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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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number
05/20.
Length: Date of creation: Jul 2005 Date of revision: Handle: RePEc:lec:leecon:05/20
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Find related papers by JEL classification: C60 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - General D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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