The variable precision method for elicitation of probability weighting functions

Abstract

This study introduces a nonparametric method to elicit decision weights under prospect theory. These weights carry the attitudes and subjective beliefs of individuals toward risks and uncertainties. Our variable precision method adopts a dynamic mechanism that can elicit the measuring points of individual probability weighting flexibly. These points are used to exhibit violations of expected utility theory, which measures individual risk attitudes and captures subjective beliefs on probabilities. Our method is flexible, tractable, and cognitively less demanding compared with other nonparametric elicitations in the literature. Experimental studies are conducted on a sample of Hong Kong (China) residents to verify our method. Our experimental results yield a prevailing inverse-S shape. We conduct the analyses and uncover their implications by comparing them with the results of residents of Beijing, Shanghai, Paris, and Amsterdam.