Curvature of the probability weighting function
Article Abstract:
Selecting among risky alternatives may generate an outcome whose psychological weight may not correspond to its probability. The probability weighting function in prospect utility and other rank-dependent utility theories allows the nonlinear weighting of probabilities. The properties of the weighting function in prospect theory are examined both conceptually and empirically. The analysis focuses on four issues: the empirical properties satisfied by the probability weighting, the possibility of a corresponding intuitive preference condition for each of the weighting function's empirical property, the possible existence of parsimonious functional forms of the weighting function that are consistent with these empirical problems, and the direction of the nonlinearity of the probability weights.
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1996
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Habits and the anomalies in intertermporal choice
Article Abstract:
A discounted utility model that incorporates habit formation is shown to be capable of addressing the most ordinary anomalies in intertemporal choice. Under habit formation, the outcome in each period is compared to the customary outcome. This discounted utility model under habit formation jointly accounts for the two leading anomalies in intertemporal choice, namely decreasing impatience and negative time preference. The model is found to have descriptive, prescriptive and normative values. Because it has prescriptive value, the model's predictions can be proven true by perceptive and experienced people. Its normative value derives from the fact that decisionmakers consider habit formation as an effective constraint and therefore find the classical discounted utility appealing.
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1997
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