A parameter-free elicitation of the probability weighting function in medical decision analysis

A parameter-free elicitation of the probability weighting function in medical decision analysis

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Article ID: iaor20031957
Country: United States
Volume: 46
Issue: 11
Start Page Number: 1485
End Page Number: 1496
Publication Date: Nov 2000
Journal: Management Science
Authors: ,
Keywords: decision theory
Abstract:

An important reason why people violate expected utility theory is probability weighting. Previous studies on the probability weighting function typically assume a specific parameteric form, exclude heterogeneity in individual preferences, and exclusively consider monetary decision making. This study presents a method to elicit the probability weighting function in rank-dependent expected utility theory that makes no prior assumptions about the functional form of the probability weighting function. We use both aggreagate and individual subject data, thereby allowing for heterogeneity of individual preferences, and we examine probability weighting in a new domain, medical decision making. There is significant evidence of probability weighting both at the aggregate and at the individual subject level. The modal probability weighting function is inverse S-shaped, displaying both lower subadditivity and upper subadditivity. Probability weighting is in particular relevant at the boundaries of the unit interval. Compared to studies involving monetary outcomes, we generally find more elevation of the probability weighting function. The robustness of the empirical findings on probability weighting indicates its importance. Ignoring probability weighting in modeling decision under risk and in utility measurement is likely to lead to descriptively invalid theories and distorted elicitations.

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