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On the Shape of the Probability Weighting Function

1999; Elsevier BV; Volume: 38; Issue: 1 Linguagem: Inglês

10.1006/cogp.1998.0710

1095-5623

Richard Gonzalez, George Wu,

Economic and Environmental Valuation

Empirical studies have shown that decision makers do not usually treat probabilities linearly. Instead, people tend to overweight small probabilities and underweight large probabilities. One way to model such distortions in decision making under risk is through a probability weighting function. We present a nonparametric estimation procedure for assessing the probability weighting function and value function at the level of the individual subject. The evidence in the domain of gains supports a two-parameter weighting function, where each parameter is given a psychological interpretation: one parameter measures how the decision maker discriminates probabilities, and the other parameter measures how attractive the decision maker views gambling. These findings are consistent with a growing body of empirical and theoretical work attempting to establish a psychological rationale for the probability weighting function.