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A simple derivation of Prelec’s probability weighting function

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posted on 14.05.2009, 13:45 by Ali al-Nowaihi, Sanjit Dhami
Since Kahneman and Tversky (1979), it has been generally recognized that decision makers overweight low probabilities and underweight high probabilities. Of the several weighting functions that have been proposed, that of Prelec (1998) has the attractions that it is parsimonious, consistent with much of the available empirical evidence and has an axiomatic foundation. Luce (2001) provided a simpler derivation based on reduction invariance, rather than compound invariance of Prelec (1998). This note gives a simpler form of reduction invariance, which we call power invariance. A more direct derivation of Prelec’s function is given, achieving a further simplification.

History

Publisher

Dept. of Economics, University of Leicester

Available date

14/05/2009

Publisher version

http://www.le.ac.uk/economics/research/discussion/papers2005.html

Book series

Discussion Papers in Economics;05/20

Language

en