Parameter-Free Elicitation of Utility and Probability Weighting Functions
This paper proposes a two-step method to successively elicit utility functions and decision weights under rank-dependent expected utility theory and its "more descriptive" version: cumulative prospect theory. The novelty of the method is that it is parameter-free, and thus elicits the whole individual preference functional without imposing any prior restriction. This method is used in an experimental study to elicit individual utility and probability weighting functions for monetary outcomes in the gain and loss domains. Concave utility functions are obtained for gains and convex utility functions for losses. The elicited weighting functions satisfy upper and lower subadditivity and are consistent with previous parametric estimations. The data also show that the probability weighting function for losses is more "elevated" than for gains.
Volume (Year): 46 (2000)
Issue (Month): 11 (November)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
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.:
- Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
- 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.
- Lattimore, Pamela K. & Baker, Joanna R. & Witte, Ann D., 1992. "The influence of probability on risky choice: A parametric examination," Journal of Economic Behavior & Organization, Elsevier, vol. 17(3), pages 377-400, May.
- Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
- Camerer, Colin F, 1989. "An Experimental Test of Several Generalized Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 61-104, April.
- Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
- Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
- George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
- Fennema, Hein & van Assen, Marcel, 1998. "Measuring the Utility of Losses by Means of the Tradeoff Method," Journal of Risk and Uncertainty, Springer, vol. 17(3), pages 277-95, December.
- Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Peter Wakker & Daniel Deneffe, 1996. "Eliciting von Neumann-Morgenstern Utilities When Probabilities Are Distorted or Unknown," Management Science, INFORMS, vol. 42(8), pages 1131-1150, August.
- Bostic, Raphael & Herrnstein, R. J. & Luce, R. Duncan, 1990. "The effect on the preference-reversal phenomenon of using choice indifferences," Journal of Economic Behavior & Organization, Elsevier, vol. 13(2), pages 193-212, March.
- John C. Hershey & Paul J. H. Schoemaker, 1985. "Probability Versus Certainty Equivalence Methods in Utility Measurement: Are they Equivalent?," Management Science, INFORMS, vol. 31(10), pages 1213-1231, October.
- Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Craig R. Fox & Amos Tversky, 1998. "A Belief-Based Account of Decision Under Uncertainty," Management Science, INFORMS, vol. 44(7), pages 879-895, July.
- 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.
- Segal, Uzi, 1987.
"Some remarks on Quiggin's anticipated utility,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 8(1), pages 145-154, March.
- Tversky, Amos & Wakker, Peter, 1995. "Risk Attitudes and Decision Weights," Econometrica, Econometric Society, vol. 63(6), pages 1255-80, November.
- Pamela K. Lattimore & Joanna R. Baker & A. Dryden Witte, 1992. "The Influence Of Probability on Risky Choice: A parametric Examination," NBER Technical Working Papers 0081, National Bureau of Economic Research, Inc.
- Wu, George & Gonzalez, Richard, 1998. "Common Consequence Conditions in Decision Making under Risk," Journal of Risk and Uncertainty, Springer, vol. 16(1), pages 115-39, April.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:46:y:2000:i:11:p:1497-1512. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If references are entirely missing, you can add them using this form.