On the Source and Instability of Probability Weighting /
Frydman, Cary.
On the Source and Instability of Probability Weighting / Cary Frydman, Lawrence J. Jin. - Cambridge, Mass. National Bureau of Economic Research 2023. - 1 online resource: illustrations (black and white); - NBER working paper series no. w31573 . - Working Paper Series (National Bureau of Economic Research) no. w31573. .
August 2023.
We propose and experimentally test a new theory of probability distortions in risky choice. The theory is based on a core principle from neuroscience called efficient coding, which states that information is encoded more accurately for those stimuli that the agent expects to encounter more frequently. As the agent's prior beliefs vary, the model predicts that probability distortions change systematically. We provide novel experimental evidence consistent with the prediction: lottery valuations are more sensitive to probabilities that occur more frequently under the subject's prior beliefs. Our theory generates additional novel predictions regarding heterogeneity and time variation in probability distortions.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
Behavioral Microeconomics: Underlying Principles
Behavioral Finance: Underlying Principles
Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
On the Source and Instability of Probability Weighting / Cary Frydman, Lawrence J. Jin. - Cambridge, Mass. National Bureau of Economic Research 2023. - 1 online resource: illustrations (black and white); - NBER working paper series no. w31573 . - Working Paper Series (National Bureau of Economic Research) no. w31573. .
August 2023.
We propose and experimentally test a new theory of probability distortions in risky choice. The theory is based on a core principle from neuroscience called efficient coding, which states that information is encoded more accurately for those stimuli that the agent expects to encounter more frequently. As the agent's prior beliefs vary, the model predicts that probability distortions change systematically. We provide novel experimental evidence consistent with the prediction: lottery valuations are more sensitive to probabilities that occur more frequently under the subject's prior beliefs. Our theory generates additional novel predictions regarding heterogeneity and time variation in probability distortions.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
Behavioral Microeconomics: Underlying Principles
Behavioral Finance: Underlying Principles
Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets