Probability Weighting Functions

18 Pages Posted: 17 Oct 2015

See all articles by Martina Nardon

Martina Nardon

Ca Foscari University of Venice - Dipartimento di Economia

Paolo Pianca

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: October 12, 2015

Abstract

Cumulative prospect theory (CPT) has been proposed as an alternative to expected utility theory to explain irregular behavior by economic agents. CPT comprises two key transformations: one of outcome values and the other of objective probabilities. Risk attitudes are derived from the shapes of these transformations as well as their interaction. The focus of this contribution is on the transformation of objective probability, which is commonly referred as probability weighting function. We review different families of weighting functions proposed in the literature and study their features.

Keywords: Cumulative prospect theory, probability weighting function

JEL Classification: C63, D81, G13

Suggested Citation

Nardon, Martina and Pianca, Paolo, Probability Weighting Functions (October 12, 2015). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 29/WP/2015, Available at SSRN: https://ssrn.com/abstract=2675133 or http://dx.doi.org/10.2139/ssrn.2675133

Martina Nardon (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Paolo Pianca

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy
+390412346915 (Phone)
+390415221756 (Fax)

HOME PAGE: www.dma.unive.it/~pianca

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