Separating attitudes towards money from attitudes towards probabilities: Stake effects and ambiguity as a test for prospect theory

Arbeitspapier

Prospect theory (PT) is the dominant descriptive theory of decision making under risk today. For the modeling of choices, PT relies on a psychologically founded separation of risk attitudes into attitudes towards outcomes, captured in a value function; and attitudes towards probabilities, captured in a probability weighting function. However, while it is theoretically sound, it is unclear whether this clear separation is reflected in actual choices. To test this, we designed two experiments. In the first experiment, we elicit the value and probability weighting functions both under known and unknown probabilities. The results support PT and show that the value function is unaffected by the nature of the probabilities, which only affects probability weighting. More in general, this finding supports theories that represent ambiguity attitudes through probability transformations rather than utility transformations. In the second experiment, we examine the effects of an increase in stakes on risk attitudes. We find that the stake increase is not reflected in the value function, but rather in the weighting function, thus contradicting PT's prediction.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: WZB Discussion Paper ; No. SP II 2013-401

Classification and Topics

• Classification: Wirtschaft ; Design of Experiments: Laboratory, Individual ; Criteria for Decision-Making under Risk and Uncertainty
• Subject: prospect theory ; value functions ; probability weighting ; risk attitudes ; ambiguity aversion ; modeling of preferences

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Vieider, Ferdinand M. ; Cingl, Lubomír ; Martinsson, Peter ; Stojic, Hrvoje
• Event: Veröffentlichung
• (who): Wissenschaftszentrum Berlin für Sozialforschung (WZB)
• (where): Berlin
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/83653
• Last update: 10.03.2025, 11:41 AM CET