Distinguishing Probability Weighting from Risk Misperceptions in Field Data

Levon Barseghyan; Francesca Molinari; Ted O'Donoghue; Joshua C. Teitelbaum

doi:10.1257/aer.103.3.580

American Economic Review Vol. 103 No. 3 2013

Distinguishing Probability Weighting from Risk Misperceptions in Field Data

Levon Barseghyan¹; Francesca Molinari¹; Ted O'Donoghue¹; Joshua C. Teitelbaum²

¹ Department of Economics, Cornell University, Ithaca, NY 14853. · ² Georgetown University Law Center, 600 New Jersey Avenue NW, Washington, DC 20001.

Abstract

We 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.

DOI: 10.1257/aer.103.3.580
Volume: 103
Issue: 3
Pages: 580-585
Language: en
Sources: bibtex:phds-export.bib crossref openalex

Distinguishing Probability Weighting from Risk Misperceptions in Field Data

Abstract

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