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Discriminating among probability weighting functions using adaptive design optimization
Authors:Daniel R. Cavagnaro  Mark A. Pitt  Richard Gonzalez  Jay I. Myung
Affiliation:1. Mihaylo College of Business and Economics, California State University-Fullerton, Fullerton, CA, USA
2. Ohio State University, Columbus, OH, USA
3. University of Michigan, Ann Arbor, MI, USA
Abstract:Probability weighting functions relate objective probabilities and their subjective weights, and play a central role in modeling choices under risk within cumulative prospect theory. While several different parametric forms have been proposed, their qualitative similarities make it challenging to discriminate among them empirically. In this paper, we use both simulation and choice experiments to investigate the extent to which different parametric forms of the probability weighting function can be discriminated using adaptive design optimization, a computer-based methodology that identifies and exploits model differences for the purpose of model discrimination. The simulation experiments show that the correct (data-generating) form can be conclusively discriminated from its competitors. The results of an empirical experiment reveal heterogeneity between participants in terms of the functional form, with two models (Prelec-2, Linear-in-Log-Odds) emerging as the most common best-fitting models. The findings shed light on assumptions underlying these models.
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