Choice-Based Elicitation and Decomposition of Decision Weights for Gains and Losses Under Uncertainty

31 Pages Posted: 21 Mar 2003

See all articles by Mohammed Abdellaoui

Mohammed Abdellaoui

Grope de Recherche sur le Risque, l'Informatin et la Décision (GRID)

Frank Vossman

affiliation not provided to SSRN

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: February 2003

Abstract

This Paper reports the results of an experimental parameter-free elicitation and decomposition of decision weights under uncertainty. Assuming cumulative prospect theory, utility functions were elicited for gains and losses at an individual level using the trade-off method. Then decision weights were elicited using certainty equivalents of uncertain two-outcome prospects. Furthermore, decision weights were decomposed using observable choice instead of invoking other empirical primitives as in the previous experimental studies. The choice-based elicitation of decision weights allows for a quantitative study of their characteristics, and also allows, among other things, to confront the sign-dependence hypothesis with observed choice under uncertainty. Our results confirm concavity of the utility function in the gain domain and bounded sub-additivity of decision weights as well as choice-based subjective probabilities. We also find evidence of sign-dependence of decision weights.

Keywords: Decision under uncertainty (ambiguity), choquet expected utility, cumulative prospect theory, decision weights, subjective probabilities, probability weighting

JEL Classification: D81

Suggested Citation

Abdellaoui, Mohammed and Vossman, Frank and Weber, Martin, Choice-Based Elicitation and Decomposition of Decision Weights for Gains and Losses Under Uncertainty (February 2003). Available at SSRN: https://ssrn.com/abstract=389642

Mohammed Abdellaoui (Contact Author)

Grope de Recherche sur le Risque, l'Informatin et la Décision (GRID) ( email )

Maison de la Recherche de l'ESTP
30 avenue du Président Wilson
Cachan, 94230
France

HOME PAGE: http://www.grid.ensam.estp.fr/abdellaoui/index.html

Frank Vossman

affiliation not provided to SSRN

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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