Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/207525 
Year of Publication: 
2019
Series/Report no.: 
IZA Discussion Papers No. 12701
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
The psychological basis for rank-dependent probability weighting, and for an inverse-S probability weighting function (PWF) in particular, has often been questioned. I examine the existence and shape of the PWF in a model allowing for optimism/pessimism over probability distributions and for loss averse/gain loving stochastic reference dependence. I give commonly observed shapes of PWF a psychological interpretation. In particular, I establish a deep connection between two of the most established phenomena in decisionmaking: loss aversion and the inverse-S PWF: the former is a pre- condition for the latter.
Subjects: 
probability weighting
rank dependent expected utility
loss aversion
reference dependence
optimism
pessimism
JEL: 
D81
D01
Document Type: 
Working Paper

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