TY  - BOOK
AU  - Frydman,Cary
AU  - Jin,Lawrence J.
ED  - National Bureau of Economic Research.
TI  - On the Source and Instability of Probability Weighting
T2  - NBER working paper series
PY  - 2023///
CY  - Cambridge, Mass.
PB  - National Bureau of Economic Research
KW  - Behavioral Microeconomics: Underlying Principles
KW  - jelc
KW  - Behavioral Finance: Underlying Principles
KW  - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
N1  - August 2023; Hardcopy version available to institutional subscribers
N2  - 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
UR  - https://www.nber.org/papers/w31573
UR  - http://dx.doi.org/10.3386/w31573
ER  -