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What Determines the Shape of the Probability Weighting Function under Uncertainty?

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Author Info

  • Kilka, Michael

    (Sonderforschungsbereich 504)

  • Weber, Martin

    ()
    (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)

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    Abstract

    Decision weights are an important component in recent theories for decision making under uncertainty. To better explain these decision weights, a two stage approach has been proposed: first, the probability of an event is judged and then this probability is transformed by the probability weighting function known from decision making under risk. We extend the two stage approach by allowing the probability weighting function to depend on the type of uncertainty. Using this more general approach, certain properties of decision weights can be attributed to certain properties of probability judgments and/or to certain properties of probability weighting. After deriving these relations between decision weights, probability judgments and probability weighting under uncertainty, we present an empirical study which shows that it is indeed neccessary to allow the probability weighting function to be source dependent. The analysis includes an examination of properties of the probability weighting function under uncertainty which have not been considered yet.

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    Bibliographic Info

    Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 98-11.

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    Length: 31 pages
    Date of creation: 20 Jul 1998
    Date of revision:
    Handle: RePEc:xrs:sfbmaa:98-11

    Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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    Cited by:
    1. Juergen Eichberger & David Kelsey & Burkhard C. Schipper, 2003. "Ambiguity and Social Interaction," Bonn Econ Discussion Papers bgse23_2003, University of Bonn, Germany.
    2. Grant, Simon & Chateauneuf, A. & Eichberger, J., 2002. "Choice under Uncertainty with the Best and Worst in Mind: Neo-additive Capacities," Working Papers 2002-10, Rice University, Department of Economics.
    3. Anna Maffioletti & Michele Santoni, 2001. "Do trade union leaders violate subjective expected utility? Some insight from experimental data," Departmental Working Papers 2001-15, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.

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