Subjective Probability Weighting and the Discovered Preference Hypothesis |
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Authors: | Gijs van de Kuilen |
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Institution: | (1) Department of Economics, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands |
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Abstract: | Numerous studies have convincingly shown that prospect theory can better describe risky choice behavior than the classical
expected utility model because it makes the plausible assumption that risk aversion is driven not only by the degree of sensitivity
toward outcomes, but also by the degree of sensitivity toward probabilities. This article presents the results of an experiment
aimed at testing whether agents become more sensitive toward probabilities over time when they repeatedly face similar decisions,
receive feedback on the consequences of their decisions, and are given ample incentives to reflect on their decisions, as
predicted by Plott’s Discovered Preference Hypothesis (DPH). The results of a laboratory experiment with N = 62 participants support this hypothesis. The elicited subjective probability weighting function converges significantly
toward linearity when respondents are asked to make repeated choices and are given direct feedback after each choice. Such
convergence to linearity is absent in an experimental treatment where respondents are asked to make repeated choices but do
not experience the resolution of risk directly after each choice, as predicted by the DPH.
I thank Peter P. Wakker for useful comments and suggestions. |
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Keywords: | learning probability weighting rational choice nonexpected utility |
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