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Distinguishing Probability Weighting from Risk Misperceptions in Field Data

7 Pages Posted: 15 Jan 2013 Last revised: 14 Jun 2013

Levon Barseghyan

Cornell University

Francesca Molinari

Cornell University - Department of Economics

Ted O'Donoghue

Cornell University - Department of Economics

Joshua C. Teitelbaum

Georgetown University Law Center

Date Written: 2013

Abstract

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

Suggested Citation

Barseghyan, Levon and Molinari, Francesca and O'Donoghue, Ted and Teitelbaum, Joshua C., Distinguishing Probability Weighting from Risk Misperceptions in Field Data (2013). American Economic Review: Papers and Proceedings, Vol. 103, No. 3, pp. 580-585, 2013; Georgetown Law and Economics Research Paper No. 13-002. Available at SSRN: https://ssrn.com/abstract=2200543 or http://dx.doi.org/10.2139/ssrn.2200543

Levon Barseghyan

Cornell University ( email )

Ithaca, NY 14853
United States

Francesca Molinari

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6367 (Phone)
607-255-2818 (Fax)

HOME PAGE: http://www.arts.cornell.edu/econ/fmolinari/

Ted O'Donoghue

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6287 (Phone)
607-255-2818 (Fax)

Joshua C. Teitelbaum (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue NW
Washington, DC 20001
United States
202-661-6589 (Phone)

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