New Publication in Journal of Risk and Uncertainty

The paper by Johannes Jaspersen, Christian König-Kersting and Marc Ragin empirically validating Viscusi's Prospective Reference Theory of risky decision-making and extending it to explain broader probability distortion anomalies is forthcoming in the Journal of Risk and Uncertainty (picture: the authors).

Abstract

When faced with a risky prospect, people often make decisions which are inconsistent with an objective assessment of probability. Viscusi's Prospective Reference Theory (PRT, Viscusi 1989) model offers a simple and intuitive framework to model such behavior. We conduct an experiment to test the validity of PRT, focusing on the unique pattern of dominance violations predicted by the model. Subjects' dominated choices are more consistent with PRT than with other models, providing novel empirical support for PRT. In addition we also test the possible source of the probability distortions. Subjects' tendency to anchor correlates positively with likelihood insensitivity, implying that for some subjects, their decisions under risk may be caused by heuristic processing. To further illustrate PRT's potential, we discuss how it applies to several new choice anomalies and extend the model to capture other commonly-observed behaviors, such as choices implying an inverse S-shaped probability weighting function.