Probability weights in rank-dependent utility with binary even-chance independence
✍ Scribed by David E. Bell; Peter C. Fishburn
- Publisher
- Elsevier Science
- Year
- 2003
- Tongue
- English
- Weight
- 284 KB
- Volume
- 47
- Category
- Article
- ISSN
- 0022-2496
No coin nor oath required. For personal study only.
✦ Synopsis
We examine the effects of a weak version of expected utility's independence axiom on the probability weighting function in rankdependent utility. Our weak independence axiom says that a 50-50 lottery between a two-outcome gamble and its certainty equivalent is indifferent to the certainty equivalent. A variety of nonlinear probability weighting functions satisfy this axiom, but most weighting functions proposed by others do not. Nevertheless, the axiom accommodates weighting functions that are quite similar to the inverse S-shaped concave-convex functions of others that overvalue small probabilities and undervalue large probabilities.