Efficient elicitation of utility and probability weighting functions
AbstractElicitation methods in decision making under risk allow a researcher to infer the subjective utilities of outcomes as well as the subjective weights of probabilities from the observed preferences of an individual. An optimally efficient elicitation method is proposed, which takes into account the inevitable distortion of preferences by random errors and minimizes the effect of such errors on the inferred utility and probability weighting functions. Under mild assumptions, the optimally efficient method for eliciting utilities (weights) of many outcomes (probabilities) is the following three-stage procedure. First, a probability is elicited whose subjective weight is one half. Second, an individual’s utility function is elicited through the midpoint chaining certainty equivalent method employing the probability elicited at the first stage as an input. Finally, an individual’s probability weighting function is elicited through the probability equivalent method.
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 Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 211.
Date of creation:
Date of revision:
decision theory; rank-dependent expected utility; cumulative prospect theory; von Neumann-Morgenstern utility; probability weighting; elicitation;
Find related papers by JEL classification:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
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.:
- Mark McCord & Richard de Neufville, 1986. ""Lottery Equivalents": Reduction of the Certainty Effect Problem in Utility Assessment," Management Science, INFORMS, vol. 32(1), pages 56-60, January.
- Starmer, Chris & Sugden, Robert, 1989. " Probability and Juxtaposition Effects: An Experimental Investigation of the Common Ratio Effect," Journal of Risk and Uncertainty, Springer, vol. 2(2), pages 159-78, June.
- Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
- Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marita Kieser).
If references are entirely missing, you can add them using this form.