Distinguishing Probability Weighting from Risk Misperceptions in Field Data
AbstractWe 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.
CitationBarseghyan, 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
- C93 Field Experiments
- D81 Criteria for Decision-Making under Risk and Uncertainty