DP3756 Choice-Based Elicitation and Decomposition of Decision Weights for Gains and Losses Under Uncertainty

Author(s): Mohammed Abdellaoui, Frank Vossman, Martin Weber
Publication Date: February 2003
Keyword(s): choquet expected utility, cumulative prospect theory, decision under uncertainty (ambiguity), decision weights, probability weighting, subjective probabilities
JEL(s): D81
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3756

This Paper reports the results of an experimental parameter-free elicitation and decomposition of decision weights under uncertainty. Assuming cumulative prospect theory, utility functions were elicited for gains and losses at an individual level using the trade-off method. Then decision weights were elicited using certainty equivalents of uncertain two-outcome prospects. Furthermore, decision weights were decomposed using observable choice instead of invoking other empirical primitives as in the previous experimental studies. The choice-based elicitation of decision weights allows for a quantitative study of their characteristics, and also allows, among other things, to confront the sign-dependence hypothesis with observed choice under uncertainty. Our results confirm concavity of the utility function in the gain domain and bounded sub-additivity of decision weights as well as choice-based subjective probabilities. We also find evidence of sign-dependence of decision weights.