What Determines the Shape of the Probability Weighting Function?

CER-ETH - Center of Economic Research at ETH Zurich, Working Paper No. 06/54

41 Pages Posted: 5 Sep 2006

See all articles by Helga Fehr-Duda

Helga Fehr-Duda

ETH Zürich - Center for Economic Research

Marc Schuerer

ETH Zürich - Center for Economic Research

Renate Schubert

ETH Zürich - Center for Economic Research

Date Written: August 2006

Abstract

When valuing risky prospects, people typically overweight small probabilities and underweight medium and large probabilities, but there is vast heterogeneity in individual behavior. We explore the relationship between person-specific probability weights, estimated from investment decisions in a laboratory experiment, and personal characteristics. We find considerable interaction effects with gender. While women's probability weighting is strongly and significantly susceptible to mood states, men's is not. Moreover, we show that cheerful and optimistic people weight probabilities of investment gains more favorably than do pessimistic people. People who calculate expected payoffs are less prone to probability distortions than those who do not use a lottery's expected value as a decision criterion. None of the factors studied impact subjects' valuations of monetary outcomes.

Keywords: Probability Weighting Function, Prospect Theory, Risk Aversion, Gender

Suggested Citation

Fehr-Duda, Helga and Schuerer, Marc and Schubert, Renate, What Determines the Shape of the Probability Weighting Function? (August 2006). CER-ETH - Center of Economic Research at ETH Zurich, Working Paper No. 06/54, Available at SSRN: https://ssrn.com/abstract=928376 or http://dx.doi.org/10.2139/ssrn.928376

Helga Fehr-Duda (Contact Author)

ETH Zürich - Center for Economic Research ( email )

Weinbergstr. 35
Zurich 8092
Switzerland

Marc Schuerer

ETH Zürich - Center for Economic Research ( email )

Weinbergstr. 35
Zurich 8092
Switzerland

Renate Schubert

ETH Zürich - Center for Economic Research ( email )

Weinbergstr. 35
Zurich 8092
Switzerland

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