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Choice-Based Elicitation and Decomposition of Decision Weights for Gains and Losses Under Uncertainty

  • Mohammed Abdellaoui

    ()

    (GRID-CNRS, Ecole Nationale Supérieure d'Arts et Métiers, Maison de la Recherche de l'ESTP, 30 Avenue du Président Wilson, 94230 Cachan, France)

  • Frank Vossmann

    ()

    (Lehrstuhl für Bankbetriebslehre, Universität Mannheim, 68131 Mannheim, Germany)

  • Martin Weber

    ()

    (Lehrstuhl für Bankbetriebslehre, Universität Mannheim, 68131 Mannheim, Germany)

This paper reports the results of an experimental parameter-free elicitation and decomposition of decision weights under uncertainty. Assuming cumulative prospect theory, utility functions were elicited for gains and losses at an individual level using the tradeoff method. Subsequently, decision weights were elicited through certainty equivalents of uncertain two-outcome prospects. Furthermore, decision weights were decomposed using observable choice instead of invoking other empirical primitives, as in previous experimental studies. The choice-based elicitation of decision weights allows for a quantitative study of their characteristics, and also allows, among other things, for the examination of the sign-dependence hypothesis for observed choice under uncertainty. Our results confirm concavity of the utility function in the gain domain and bounded subadditivity of decision weights and choice-based subjective probabilities. We also find evidence for sign dependence of decision weights.

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File URL: http://dx.doi.org/10.1287/mnsc.1050.0388
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 51 (2005)
Issue (Month): 9 (September)
Pages: 1384-1399

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Handle: RePEc:inm:ormnsc:v:51:y:2005:i:9:p:1384-1399
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  1. Craig R. Fox & Amos Tversky, 1998. "A Belief-Based Account of Decision Under Uncertainty," Management Science, INFORMS, vol. 44(7), pages 879-895, July.
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  12. 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.
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  15. Michael Kilka & Martin Weber, 2001. "What Determines the Shape of the Probability Weighting Function Under Uncertainty?," Management Science, INFORMS, vol. 47(12), pages 1712-1726, December.
  16. Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
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