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On the Source and Instability of Probability Weighting / Cary Frydman, Lawrence J. Jin.
- Format:
- Book
- Author/Creator:
- Frydman, Cary.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w31573.
- NBER working paper series no. w31573
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2023.
- Summary:
- 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.
- Notes:
- Print version record
- August 2023.
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