Econometrica: Nov 1995, Volume 63, Issue 6

Risk Attitudes and Decision Weights

https://doi.org/0012-9682(199511)63:6<1255:RAADW>2.0.CO;2-S
p. 1255-1280

Amos Tversky, Peter Wakker

To accommodate the observed pattern of risk-aversion and risk-seeking, as well as common violations of expected utility (e.g., the certainty effect), we introduce and characterize a weighting function according to which an event has greater impact when it turns impossibility into possibility, or possibility into certainty, that when it merely makes a possibility more or less likely. We show how to compare such weighting functions (of different individuals) with respect to the degree of departure from expected utility, and we present a method for comparing an individual's weighting functions for risk and for uncertainty.

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