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American Economic Review: Vol. 103 No. 3 (May 2013)

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Distinguishing Probability Weighting from Risk Misperceptions in Field Data

Article Citation

Barseghyan, Levon, Francesca Molinari, Ted O'Donoghue, and Joshua C. Teitelbaum. 2013. "Distinguishing Probability Weighting from Risk Misperceptions in Field Data." American Economic Review, 103(3): 580-85.

DOI: 10.1257/aer.103.3.580

Abstract

We outline a strategy for distinguishing rank-dependent probability weighting from systematic risk misperceptions in field data. Our strategy relies on singling out a field environment with two key properties: (i) the objects of choice are money lotteries with more than two outcomes; and (ii) the ranking of outcomes differs across lotteries. We first present an abstract model of risky choice that elucidates the identification problem and our strategy. The model has numerous applications, including insurance choices and gambling. We then consider the application of insurance deductible choices and illustrate our strategy using simulated data.

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Authors

Barseghyan, Levon (Cornell U)
Molinari, Francesca (Cornell U)
O'Donoghue, Ted (Cornell U)
Teitelbaum, Joshua C. (Law Center, Georgetown U)

JEL Classifications

C93: Field Experiments
D81: Criteria for Decision-Making under Risk and Uncertainty


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