Reasons for Rank-Dependent Utility Evaluations

Abstract

Three reasons for why people may evaluate utility in a rank-dependent fashion have been suggested: (1) rank-dependent weighting is a function of perceptual biases and thus not prescriptively defensible; (2) weights are (re)distributed by motivational processes which reflect stable personality characteristics of the decision maker; and (3) weights are (re)distributed as a function of the situation, allowing rank-dependent evaluation to be a rational response to an environment with asymmetric loss functions. By modifying a study by Wakker, Erev, and Weber (1994) we show that all three processes, i.e., perceptual biases, individual predispositions in weighting, as well as rational adaptation to an asymmetric loss function, can be involved in rank- dependent weighting.

JEL Classification: D81