A Simple Derivation of Prelec's Probability Weighting Function

University of Leicester, Department of Economics Working Paper No. 05/20

Journal of Mathematical Psychology, Vol. 50 , pp. 521-524, 2006

8 Pages Posted: 13 May 2008

See all articles by Ali al-Nowaihi

Ali al-Nowaihi

University of Leicester - Department of Economics

Sanjit Dhami

University of Leicester

Date Written: 2005

Abstract

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.

Keywords: Decision making under risk, Prelec's probability weighting function, Compound invariance, Reduction invariance, Power invariance, Prospect theory, Algebraic functional equations

JEL Classification: C60, D81

Suggested Citation

al-Nowaihi, Ali and Dhami, Sanjit, A Simple Derivation of Prelec's Probability Weighting Function (2005). University of Leicester, Department of Economics Working Paper No. 05/20, Journal of Mathematical Psychology, Vol. 50 , pp. 521-524, 2006, Available at SSRN: https://ssrn.com/abstract=1130811

Ali Al-Nowaihi (Contact Author)

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

Sanjit Dhami

University of Leicester ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

HOME PAGE: http://www2.le.ac.uk/departments/economics/people/sdhami

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