Measuring covariation between preference parameters: A simulation study

Much of the empirical success of Rank-Dependent Expected Utility Theory and Cumulative Prospect Theory is due to the fact that they allow for nonlinearity towards both outcomes (through the utility function) and probabilities (through the probability weighting function). Since risk attitude is jointly determined by the shapes of the two functions, it would be instructive to measure how the degree of risk aversion incorporated in the utility function empirically covaries with its counterpart from the probability weighting function. We conduct a large-scale simulation to assess whether an elicitation procedure based on the trade-off method, which essentially equals that used in recent empirical studies, allows to reliably measure the quantity of interest. We find a strong systematic distortion of measurement, which points at the limitations of the presently available elicitation techniques

Risikomessung im Kreditgeschaeft: eine empirische Analyse bankinterner Ratingverfahren

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

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 tradeoff method. Subsequently, decision weights were elicited through certainty equivalents of uncertain two-outcome prospects. Furthermore, decision weights were decomposed using observable choice instead of invoking other empirical primitives, as in previous experimental studies. The choice-based elicitation of decision weights allows for a quantitative study of their characteristics, and also allows, among other things, for the examination of the sign-dependence hypothesis for observed choice under uncertainty. Our results confirm concavity of the utility function in the gain domain and bounded subadditivity of decision weights and choice-based subjective probabilities. We also find evidence for sign dependence of decision weights.decision under uncertainty, Choquet expected utility, cumulative prospect theory, decision weights, choice-based probabilities, probability weighting