Publication detail

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

Author(s): PhDr. Lubomír Cingl Ph.D., Vieider, F., Martinsson, P., Stojic, H.,
Type: Others
Year: 2013
Number: 0
ISSN / ISBN:
Published in: Working paper - WZB Berlin
Publishing place:
Keywords:
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Suggested Citation:
Abstract: 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.

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