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Theory and Decision

, Volume 60, Issue 2–3, pp 315–334 | Cite as

Error Propagation in the Elicitation of Utility and Probability Weighting Functions

  • Pavlo BlavatskyyEmail author
Article

Abstract

Elicitation methods in decision-making under risk allow us to infer the utilities of outcomes as well as the probability weights from the observed preferences of an individual. An optimally efficient elicitation method is proposed, which takes the inevitable distortion of preferences by random errors into account and minimizes the effect of such errors on the inferred utility and probability weighting functions. Under mild assumptions, the optimally efficient method for eliciting utilities and probability weights is the following three-stage procedure. First, a probability is elicited whose subjective weight is one half. Second, the utility function is elicited through the midpoint chaining certainty equivalent method using the probability elicited at the first stage. Finally, the probability weighting function is elicited through the probability equivalent method.

Keywords

cumulative prospect theory decision theory elicitation von Neumann–Morgenstern utility probability weighting rank-dependent expected utility 

Jel classification

C91 D81 

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Copyright information

© Springer 2006

Authors and Affiliations

  1. 1.Institute for Empirical Research in EconomicsUniversity of ZurichZurichSwitzerland

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