Error Propagation in the Elicitation of Utility and Probability Weighting Functions |
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Authors: | Pavlo Blavatskyy |
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Institution: | (1) Institute for Empirical Research in Economics, University of Zurich, Winterthurerstrasse 30, CH-8006 Zurich, Switzerland |
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Abstract: | Elicitation methods in decision-making under risk allow us to infer the utilities of outcomes as well as the probability weights
from the observed preferences of an individual. An optimally efficient elicitation method is proposed, which takes the inevitable
distortion of preferences by random errors into account and minimizes the effect of such errors on the inferred utility and
probability weighting functions. Under mild assumptions, the optimally efficient method for eliciting utilities and probability
weights is the following three-stage procedure. First, a probability is elicited whose subjective weight is one half. Second,
the utility function is elicited through the midpoint chaining certainty equivalent method using the probability elicited
at the first stage. Finally, the probability weighting function is elicited through the probability equivalent method. |
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Keywords: | cumulative prospect theory decision theory elicitation von Neumann– Morgenstern utility probability weighting rank-dependent expected utility |
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