Probability Weighting Functions

Martina Nardon, Paolo Pianca
2015 Social Science Research Network  
Cumulative prospect theory (CPT) has been proposed as an alternative to expected utility theory to explain irregular behavior by economic agents. CPT comprises two key transformations: one of outcome values and the other of objective probabilities. Risk attitudes are derived from the shapes of these transformations as well as their interaction. The focus of this contribution is on the transformation of objective probability, which is commonly referred as probability weighting function. We
more » ... function. We review different families of weighting functions proposed in the literature and study their features.
doi:10.2139/ssrn.2675133 fatcat:nfxlrvdqnjawrczvgzcntr4tsq