How Categorization Shapes the Probability Weighting Function

Abstract

The shape of the probability weighting function is one of the most well-known empirical
observations in judgment and decision-making research. The tendency to overweight low
probability events and underweight high probability events stems from the categorical
distinction between “not happening,” “a chance,” and “happening.” We demonstrate that
individuals categorize uncertainty differently across contexts (e.g., numeric and visual
representations of risk). These categorical perceptions produce additional probability
distortion in the probability space. The resulting behavioral patterns necessitate revising
the traditional inverse-S shaped probability weighting function. Using experimental and
model-based approaches, we demonstrate that probability sensitivity, and thus the shape of
probability weighting functions, depends crucially on how individuals categorize risk.
Results indicate that these intermediate categories of probability distortion have a median
effect size that is 28% as large as the probability distortion observed at 0 and 1.

Keywords: Probability weighting function, Categorization, Judgement and Decision Making