On the Shape of the Probability Weighting Function

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 p...

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Bibliographic Details
Published inCognitive psychology Vol. 38; no. 1; pp. 129 - 166
Main Authors Gonzalez, Richard, Wu, George
Format Journal Article
LanguageEnglish
Published Netherlands Elsevier Inc 01.02.1999
Academic Press
Subjects
Cognition & reasoning
Decision making
Humans
Judgment
Probability
Psychology
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Summary: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.
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ISSN:0010-0285
1095-5623
DOI:10.1006/cogp.1998.0710