The influence of probability on risky choice: A parametric examination
The appeal of expected utility theory as a basis for a descriptive model of risky decision making has diminished as a result of empirical evidence which suggests that individuals do not behave in a manner consistent with the prescriptive tenets of EUT. In this paper, we explore the influence of probability on risky choice, by proposing and estimating a parametric model of risky decision making. Our results suggest that models which provide for probability transformations are most appropriate for the majority of subjects. Further, we find that the transformation differs for most subjects depending upon whether the risky outcomes are gains or losses. Most subjects are considerably less sensitive to changes in mid-range probability than is proposed by the expected utility model and risk-seeking behavior over ‘long-shot’ odds is common.
Lattimore, P., Baker, JR., & Witte, AD. (1992). The influence of probability on risky choice: A parametric examination. Journal of Economic Behavior & Organization, 17(3), 377-400. DOI: 10.1016/S0167-2681(95)90015-2