Working Paper: CEPR ID: DP3756
Authors: Mohammed Abdellaoui; Frank Vossman; Martin Weber
Abstract: This Paper reports the results of an experimental parameter-free elicitation and decomposition of decision weights under uncertainty. Assuming cumulative prospect theory, utility functions were elicited for gains and losses at an individual level using the trade-off method. Then decision weights were elicited using certainty equivalents of uncertain two-outcome prospects. Furthermore, decision weights were decomposed using observable choice instead of invoking other empirical primitives as in the previous experimental studies. The choice-based elicitation of decision weights allows for a quantitative study of their characteristics, and also allows, among other things, to confront the sign-dependence hypothesis with observed choice under uncertainty. Our results confirm concavity of the utility function in the gain domain and bounded sub-additivity of decision weights as well as choice-based subjective probabilities. We also find evidence of sign-dependence of decision weights.
Keywords: choquet expected utility; cumulative prospect theory; decision under uncertainty; ambiguity; decision weights; probability weighting; subjective probabilities
JEL Codes: D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decision weights (D81) | perceived utility of outcomes (D81) |
| subjective probabilities (D80) | decision weights (D81) |
| bounded subadditivity (D10) | decision weights for gains and losses (D81) |
| diminishing sensitivity (L15) | decision weights (D81) |
| cumulative prospect theory (CPT) predictions (D81) | elicited utility functions for gains (D11) |
| lack of evidence for convexity (D81) | elicited utility functions for losses (D11) |