Influence of Probability on Risky Choice: A Parametric Examination

• NCJ Number: 154653
• Journal: Journal of Economic Behavior and Organization Volume: 17 Dated: (1992) Pages: 377-400
• Author(s): P K Lattimore; J R Baker; A D Witte
• Date Published: 1992
• Length: 24 pages
• Sponsoring Agency: National Science Foundation; National Institute of Justice (NIJ); US Dept of Justice NIJ Pub
• Publication Format: Article
• Publication Type: Research (Applied/Empirical)
• Language: English
• Country: Netherlands
• Note: NIJ Reprint Series

Annotation

This study proposes a parametric model of risky decisionmaking to explore the probability of risky choice.

Abstract

Preference models over gains and losses were estimated that explicitly allowed for subjective valuation of outcome levels and probabilities. The findings presented here are consistent with results reported in the literature which suggest that transformations of probabilities are common in risky decisionmaking. However, this research extends those findings by showing that behavior is significantly affected by the transformation of probabilities. Specifically, the findings indicate that, for most subjects, models which allow for transformation of objective probabilities provide significantly more explanatory power than models such as expected utility theory (EUT) which do not allow such a transform. The parametric model was useful here in providing insight on the extent of over- and underweighting probabilities, sensitivity to changes in probability, the impact of decision weights on risk-taking behavior, and the impact of outcomes on risk-taking behavior. 8 tables, 4 figures, 14 notes, 25 references, and 1 appendix