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

  • Abdellaoui, Mohammed
  • Vossman, Frank
  • Weber, Martin

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 trade-off method. Then decision weights were elicited using certainty equivalents of uncertain two-outcome prospects. Furthermore, decision weights were decomposed using observable choice instead of invoking other empirical primitives as in the previous experimental studies. The choice-based elicitation of decision weights allows for a quantitative study of their characteristics, and also allows, among other things, to confront the sign-dependence hypothesis with observed choice under uncertainty. Our results confirm concavity of the utility function in the gain domain and bounded sub-additivity of decision weights as well as choice-based subjective probabilities. We also find evidence of sign-dependence of decision weights.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3756.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3756
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  1. 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.
  2. George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
  3. 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.
  4. Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
  5. Craig R. Fox & Amos Tversky, 1998. "A Belief-Based Account of Decision Under Uncertainty," Management Science, INFORMS, vol. 44(7), pages 879-895, July.
  6. Tversky, Amos & Wakker, Peter, 1995. "Risk Attitudes and Decision Weights," Econometrica, Econometric Society, vol. 63(6), pages 1255-80, November.
  7. 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.
  8. Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 16(1), pages 65-88, February.
  9. Fox, Craig R & Rogers, Brett A & Tversky, Amos, 1996. "Options Traders Exhibit Subadditive Decision Weights," Journal of Risk and Uncertainty, Springer, vol. 13(1), pages 5-17, July.
  10. 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.
  11. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  12. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  13. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
  14. Wakker, Peter P, 2001. "Testing and Characterizing Properties of Nonadditive Measures through Violations of the Sure-Thing Principle," Econometrica, Econometric Society, vol. 69(4), pages 1039-59, July.
  15. Wakker, Peter & Tversky, Amos, 1993. " An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 147-75, October.
  16. 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.
  17. 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.
  18. Heath, Chip & Tversky, Amos, 1991. " Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 5-28, January.
  19. Quiggin, John & Horowitz, John, 1995. "Time and Risk," Journal of Risk and Uncertainty, Springer, vol. 10(1), pages 37-55, January.
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