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A simple derivation of Prelec’s probability weighting function

By Ali al-Nowaihi and Sanjit Dhami

Abstract

Since Kahneman and Tversky (1979), it has been generally recognized that decision makers overweight low probabilities and underweight high probabilities. Of the several weighting functions that have been proposed, that of Prelec (1998) has the attractions that it is parsimonious, consistent with much of the available empirical evidence and has an axiomatic foundation. Luce (2001) provided a simpler derivation based on reduction invariance, rather than compound invariance of Prelec (1998). This note gives a simpler form of reduction invariance, which we call power invariance. A more direct derivation of Prelec’s function is given, achieving a further simplification

Topics: Decision making under risk, Prelec’s probability weighting function, Compound invariance, Reduction invariance, Power invariance, Prospect theory, Algebraic functional equations
Publisher: Dept. of Economics, University of Leicester
Year: 2005
OAI identifier: oai:lra.le.ac.uk:2381/4466

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Citations

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  2. (1984). Choices, values and frames. doi
  3. (1978). Functional Equations in Economics.
  4. (1979). Prospect theory : An analysis of decision under risk. doi
  5. (2001). Reduction invariance and Prelec’s weighting functions. doi
  6. (1998). The probability weighting function. doi

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