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Some remarks about the probability weighting function

Author

Listed:
  • Alarie, Yves

    (HEC Montreal, Canada Research Chair in Risk Management)

  • Dionne, Georges

    (HEC Montreal, Canada Research Chair in Risk Management)

Abstract

This paper analyses the implications of basic tests for lotteries on the probability weighting function w(p). We first show that the three standard tests for lottery choices imply that the w(p) function has a S-shape (first concave then convex) but is not regressive. For the pricing of lotteries the function has still a S-shape but is regressive. In the last section we propose a solution that accomodates the restrictions imposed by the choice tests and the pricing tests.

Suggested Citation

  • Alarie, Yves & Dionne, Georges, 1998. "Some remarks about the probability weighting function," Working Papers 98-17, HEC Montreal, Canada Research Chair in Risk Management.
    • Handle: RePEc:ris:crcrmw:1998_017
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    Cited by:

    1. Alarie, Yves, 2000. "L’importance de la procédure dans les choix de loteries," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(3), pages 321-340, septembre.

    More about this item

    Keywords

    Probability weighting function w(p); standard tests for lottery choices; w(p) function; regressive function; tests; pricing of lotteries;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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