A Simple Derivation of Prelec's Probability Weighting Function
University of Leicester, Department of Economics Working Paper No. 05/20
Journal of Mathematical Psychology, Vol. 50 , pp. 521-524, 2006
8 Pages Posted: 13 May 2008
Date Written: 2005
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.
Keywords: Decision making under risk, Prelec's probability weighting function, Compound invariance, Reduction invariance, Power invariance, Prospect theory, Algebraic functional equations
JEL Classification: C60, D81
Suggested Citation: Suggested Citation
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