Distinguishing Probability Weighting from Risk Misperceptions in Field Data
7 Pages Posted: 15 Jan 2013 Last revised: 14 Jun 2013
Date Written: 2013
The paper outlines a strategy for distinguishing rank-dependent probability weighting from systematic risk misperceptions in field data. Our strategy relies on singling out a field environment with two key properties: (i) the objects of choice are money lotteries with more than two outcomes and (ii) the ranking of outcomes differs across lotteries. We first present an abstract model of risky choice that elucidates the identification problem and our strategy. The model has numerous applications, including insurance choices and gambling. We then consider the application of insurance deductible choices and illustrate our strategy using simulated data.
Keywords: probability weighting, risk misperceptions, insurance
JEL Classification: D01, D03, D12, D81, G22
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