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A simple derivation of Prelec’s probability weighting function

Author

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  • Ali al-Nowaihi
  • Sanjit Dhami

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.

Suggested Citation

  • Ali al-Nowaihi & Sanjit Dhami, 2005. "A simple derivation of Prelec’s probability weighting function," Discussion Papers in Economics 05/20, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:05/20
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    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp05-20.pdf
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    Cited by:

    1. Ali al-Nowaihi & Sanjit Dhami, 2013. "A Theory of Reference Time," Discussion Papers in Economics 13/26, Division of Economics, School of Business, University of Leicester.

    More about this item

    Keywords

    Decision making under risk; Prelec’s probability weighting function; Compound invariance; Reduction invariance; Power invariance; Prospect theory; Algebraic functional equations;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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