Lossed in Translation: An Off-the-Shelf Method to Recover Probabilistic Beliefs from Loss-Averse Agents

Abstract

Strictly proper scoring rules are designed to truthfully elicit subjective probabilistic beliefs from risk neutral agents. Previous experimental studies have identified two problems with this method: (i) risk aversion causes agents to bias their reports towards the probability of 1/2, and (ii) for moderate beliefs agents simply report 1/2. Applying a prospect theory model of risk preferences, we show that loss aversion can explain both of these behavioral phenomena. Using the insights of this model, we develop a simple off-the-shelf probability assessment mechanism that encourages loss-averse agents to report true beliefs. In an experiment, we demonstrate the effectiveness of this modification in both eliminating uninformative reports and eliciting true probabilistic beliefs.

Keywords: Scoring Rule, Subjective Probability Assessment, Loss Aversion, Prospect Theory

JEL Classification: C81, C91, D03, D81