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Probability weighting is a marked feature of decision-making under risk. For poor people in rural areas of developing countries, how probabilities are evaluated matters for livelihoods decisions, especially the probabilities associated with losses. Previous studies of risky choice among poor people in developing countries seldom consider losses and do not offer a refined tracking of the probability-weighting function (PWF). We investigate probability weighting among smallholder farmers in Uganda, separately for losses and for gains, using a method (common consequence ladders) that allows refined tracking of the PWF for a population with low levels of literacy. For losses, we find marked probability weighting near zero, which is in line with evidence found in Western labs. For gains, the absence of probability weighting is remarkable, particularly its absence near 100%. We also find marked differences in probability weighting for traditional farmers which are in line with the observed livelihoods strategies in the study area. [ABSTRACT FROM AUTHOR]

Experimental studies suggest that individuals exhibit more risk aversion in choices among prospects when the payment and resolution of uncertainty are immediate relative to when it is delayed. This leads to preference reversals that cannot be attributed to discounting. When data suggest that utility is time-independent, probability weighting functions, such as those used to model prospect theory preferences, can accommodate such reversals. We propose a simple descriptive model with a two-parameter probability weighting function where one of these parameters depends on the time at which a prospect is resolved. The time-dependent parameter is responsible for the curvature of the probability weighting function and is regarded as an index of (in)sensitivity towards changes in probabilities. We provide conditions that characterize increased sensitivity towards more distant probabilities; this can account for the observed relatively less risk aversion towards delayed prospects. In our framework, the discount function is unrestricted, such that the model is compatible with empirical findings of non-constant discounting. In a simple application to bargaining we illustrate when it is advantageous for an individual to advance or delay the bargaining resolution time if an opponent displays increased sensitivity towards probability changes with delay. [ABSTRACT FROM AUTHOR]

In comparing different risk elicitation methods under the assumptions of expected utility theory, previous studies have found significant differences in the elicited risk attitudes. This paper extends this line of research to consider cumulative prospect theory by comparing risk attitudes and probability weightings determined using two elicitation methods: the method by Tanaka et al. (Am Econ Rev 100(1):557-571, 2010; TCN method) and the method by Wakker and Deneffe (Manage Sci 42(8):1131-1150, 1996; WD method). We demonstrate that the two methods reveal significantly different mean values for the measured risk attitudes. Participants are classified on average as moderately risk-averse using the TCN method, whereas the same individuals are classified as nearly risk-neutral using the WD method. Moreover, we find that on average, participants overweight low probabilities and underweight high probabilities to a greater extent with the WD method than with the TCN method. Therefore, the different elicitation methods, that both consider probability weighting, can lead to different measured values of risk attitude and probability weighting. [ABSTRACT FROM AUTHOR]

We conduct a standardized survey on risk preferences in 53 countries worldwide and estimate cumulative prospect theory parameters from the data. The parameter estimates show that significant differences on the cross-country level are to some extent robust and related to economic and cultural differences. In particular, a closer look on probability weighting underlines gender differences, economic effects, and cultural impact on probability weighting. The data set is a useful starting point for future research that investigates the impact of risk preferences on the market level. [ABSTRACT FROM AUTHOR]

This paper reports an experimental comparison of attitudes toward time and toward money in experience-based decisions. Preferences were elicited under rank-dependent utility for prospects with two or three consequences expressed either in time or in monetary units. Probabilities were unknown but learned through sampling. More specifically, time and money were compared under two conditions. In a first experiment, both consequences and probabilities of prospects were unknown and learned through sequential sampling. In a second experiment, the possible consequences were revealed after the sampling. A real incentive system was implemented for both time and money. The heterogeneity of preferences was assessed for time and for money through individual and mixed modeling estimations. We observe that the nature of consequences (time or money) modifies probability weighting in terms of elevation and sensitivity. Subjects exhibit more optimism and less sensitivity to probability changes when deciding about time than about money. Revealing the consequences impacts the shape of the utility function and leaves probability weighting unchanged. We also observe that the real incentives have no effect except for the reduction in decision errors. This effect is stronger for money than for time. [ABSTRACT FROM AUTHOR]

This study extends experimental tests of (cumulative) prospect theory (PT) over prospects with more than three outcomes and tests second-order stochastic dominance principles (Levy and Levy, Management Science 48:1334-1349, ; Baucells and Heukamp, Management Science 52:1409-1423, ). It considers choice behavior of people facing prospects of three different types: gain prospects (losing is not possible), loss prospects (gaining is not possible), and mixed prospects (both gaining and losing are possible). The data supports the distinction of risk behavior into these three categories of prospects, Further, probability weighting and diminishing sensitivity of utility as predicted by PT are observed. Loss aversion is, however, less pronounced, except for choices where one prospect is degenerate. The data suggests that the probability of losing may be relevant for loss aversion. [ABSTRACT FROM AUTHOR]

Various experimental procedures aimed at measuring individual risk aversion involve a list of pairs of alternative prospects. We first study the widely used method by Holt and Laury (Am Econ Rev 92(5):1644-1655, ), for which we find that the removal of some items from the lists yields a systematic decrease in risk aversion and scrambles the ranking of individuals by risk aversion. This bias, that we call embedding bias, is quite distinct from other confounds that have been previously observed in the use of the HL method. It may be related to empirical phenomena and theoretical developments where better prospects increase risk aversion. Nevertheless, we also find that the more recent elicitation method due to Abdellaoui et al. (Theory Decis 71:63-80, ), also based on lists but using only one and the same probability in the list, does not display any statistically significant bias when the corresponding items of the list are removed. Our results suggest that methods other than the popular HL one may be preferable for the measurement of risk aversion. [ABSTRACT FROM AUTHOR]

We find suggestive evidence that emotional balance has an impact on probability weighting incremental to demographic controls. Specifically, low negative affectivity (implying high emotional balance) tends to be a characteristic of those whose probability weighting functions exhibit lower curvature and more neutral elevation. In other words, emotional balance seems to push people in the direction of normative expected utility theory. [ABSTRACT FROM AUTHOR]

Cumulative Prospect Theory (CPT) does not explain the St. Petersburg Paradox. We show that the solutions related to probability weighting proposed to solve this paradox, (Blavatskyy, Management Science 51:677-678, 2005; Rieger and Wang, Economic Theory 28:665-679, 2006) have to cope with limitations. In that framework, CPT fails to accommodate both gambling and insurance behavior. We suggest replacing the weighting functions generally proposed in the literature by another specification which respects the following properties: (1) to solve the paradox, the slope at zero has to be finite. (2) to account for the fourfold pattern of risk attitudes, the probability weighting has to be strong enough. [ABSTRACT FROM AUTHOR]

This paper reviews the most common approaches that have been adopted to analyze and describe loss aversion under prospect theory. Subsequently, it is argued that loss aversion is a property of observable choice behavior and two new definitions of loss averse behavior are advocated. Under prospect theory, the new properties hold if the commonly used utility based measures of loss aversion are corrected by a probability based measure of loss aversion and their product exceeds 1. It is shown that prominent parametric families of weighting functions, while successful in accommodating empirical findings on probabilistic risk attitudes, may not fit well with the theoretical implications of the new loss averse behavior conditions. [ABSTRACT FROM AUTHOR]

Numerous studies have convincingly shown that prospect theory can better describe risky choice behavior than the classical expected utility model because it makes the plausible assumption that risk aversion is driven not only by the degree of sensitivity toward outcomes, but also by the degree of sensitivity toward probabilities. This article presents the results of an experiment aimed at testing whether agents become more sensitive toward probabilities over time when they repeatedly face similar decisions, receive feedback on the consequences of their decisions, and are given ample incentives to reflect on their decisions, as predicted by Plott’s Discovered Preference Hypothesis (DPH). The results of a laboratory experiment with N = 62 participants support this hypothesis. The elicited subjective probability weighting function converges significantly toward linearity when respondents are asked to make repeated choices and are given direct feedback after each choice. Such convergence to linearity is absent in an experimental treatment where respondents are asked to make repeated choices but do not experience the resolution of risk directly after each choice, as predicted by the DPH. [ABSTRACT FROM AUTHOR]

We develop a model of Disappointment in which disappointment and elation arise from comparing the outcome received, not with an expected value as in previous models, but rather with the other individual outcomes of the lottery. This approach may better reflect the way individuals are liable to experience disappointment. The model obtained accounts for classic behavioral deviations from the normative theory, offers a richer structure than previous disappointment models, and leads to a Rank-Dependent Utility formulation in a transparent way. Thus, our disappointment model may provide a clear psychological rationale for the subjective transformation of probabilities. [ABSTRACT FROM AUTHOR]

Elicitation methods in decision-making under risk allow us to infer the utilities of outcomes as well as the probability weights from the observed preferences of an individual. An optimally efficient elicitation method is proposed, which takes the inevitable distortion of preferences by random errors into account and minimizes the effect of such errors on the inferred utility and probability weighting functions. Under mild assumptions, the optimally efficient method for eliciting utilities and probability weights is the following three-stage procedure. First, a probability is elicited whose subjective weight is one half. Second, the utility function is elicited through the midpoint chaining certainty equivalent method using the probability elicited at the first stage. Finally, the probability weighting function is elicited through the probability equivalent method. [ABSTRACT FROM AUTHOR]