Risk and Rationality: The Relative Importance of Probability Weighting and Choice Set Dependence

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serval:BIB_57DAA6378E03
Type
Report: a report published by a school or other institution, usually numbered within a series.
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Working paper: Working papers contain results presented by the author. Working papers aim to stimulate discussions between scientists with interested parties, they can also be the basis to publish articles in specialized journals
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Publications
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Title
Risk and Rationality: The Relative Importance of Probability Weighting and Choice Set Dependence
Author(s)
Bruhin Adrian, Manai Maha, Santos-Pinto Luis
Institution details
Universtiy of Lausanne
Issued date
01/07/2018
Language
english
Abstract
We analyze the relative importance of probability weighting and choice set depen- dence in describing risky choices both non-parametrically and with a structural model. Our experimental design uses binary choices between lotteries that may trigger Allais Paradoxes. We change the choice set by manipulating the correlation structure of the lotteries’ payoffs while keeping their marginal distributions constant. This allows us to discriminate between probability weighting and choice set dependence. There are three main results. First, probability weighting and choice set dependence both play a role in describing aggregate choices. Second, the structural model uncovers substantial indi- vidual heterogeneity which can be parsimoniously characterized by three types: 38% of subjects engage primarily in probability weighting, 34% are influenced predominantly by choice set dependence, and 28% are mostly rational. Third, the classification of subjects into types predicts preference reversals out-of-sample. These results may not only further our understanding of choice under risk but may also prove valuable for describing the behavior of consumers, investors, and judges.
Keywords
Individual Choice under Risk, Choice Set Dependence, Probability Weighting, Latent Heterogeneity, Preference Reversals
Create date
09/11/2018 14:57
Last modification date
21/08/2019 7:09
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