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13
From subjective probabilities to decision weights: The effect of asymmetric loss functions on the evaluation of uncertain outcomes and events
 Psychological Bulletin(115
, 1994
"... Much of decision aiding uses a divideandconquer strategy to help people with risky decisions. Assessing the utility of outcomes and one's degree of belief in their likelihood are assumed to be separable tasks, the results of which can then be combined to determine the preferred alternative. Eviden ..."
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Much of decision aiding uses a divideandconquer strategy to help people with risky decisions. Assessing the utility of outcomes and one's degree of belief in their likelihood are assumed to be separable tasks, the results of which can then be combined to determine the preferred alternative. Evidence from different areas of psychology now provides a growing consensus that this assumption is too simplistic. Observed dependencies in the evaluation of uncertain outcomes and the likelihood of the events giving rise to them are frequent and systematic. Dependencies seem to derive from general strategic processes that take into consideration asymmetric costs of over vs. underestimates of uncertain quantities. This asymmetriclossfunction interpretation provides a psychological explanation for observed judgments and decisions under uncertainty and links them to other judgment tasks. The decision weights estimated when applying dependentutility models to choices are not simply reflections of perceived subjective probability but a response to several constraints, all of which modify the weight of risky or uncertain outcomes. Perhaps more than any other social science, psychology maintains an ongoing debate about its status as a coherent field of scholarship (cf. Fowler, 1990; Koch, 1969; Simon, 1992), often
On the Intuition of RankDependent Utility
, 2000
"... Among the most popular models for decision under risk and uncertainty are the rankdependent models, introduced by Quiggin and Schmeidler. Central concepts in these models are rankdependence and comonotonicity. It has been suggested in the literature that these concepts are technical tools that hav ..."
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Among the most popular models for decision under risk and uncertainty are the rankdependent models, introduced by Quiggin and Schmeidler. Central concepts in these models are rankdependence and comonotonicity. It has been suggested in the literature that these concepts are technical tools that have no intuitive or empirical content. This paper describes such contents. As
Original and cumulative prospect theory: A discussion of empirical differences
 Journal of Behavioral Decision Making
, 1997
"... This paper discusses di€erences between prospect theory and cumulative prospect theory. It shows that cumulative prospect theory is not merely a formal correction of some theoretical problems in prospect theory, but it also gives di€erent predictions. Some experiments by Lola Lopes are reanalyzed, ..."
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This paper discusses di€erences between prospect theory and cumulative prospect theory. It shows that cumulative prospect theory is not merely a formal correction of some theoretical problems in prospect theory, but it also gives di€erent predictions. Some experiments by Lola Lopes are reanalyzed, and are demonstrated to favor cumulative prospect theory over prospect theory. It turns out that the mathematical form of cumulative prospect theory is well suited for modeling the psychological phenomenon of diminishing sensitivity. *c 1997 by John Wiley & Sons, Ltd. KEY WORDS
The ongoing dialog between empirical science and measurement theory
 Journal of Mathematical Psychology
, 1996
"... This review article attempts to highlight from my personal perspective some of the major developments in the representational theory of measurement during the past 50 years. Emphasis is placed on the ongoing interplay between the development of abstract theory and the attempts to apply it to empiric ..."
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This review article attempts to highlight from my personal perspective some of the major developments in the representational theory of measurement during the past 50 years. Emphasis is placed on the ongoing interplay between the development of abstract theory and the attempts to apply it to empirically testable phenomena. The article has four major sections. The first concerns classical representational measurement, which was the successful attempt to formulate the major measurement methods of classical physics: extensive and additive conjoint structures, their distributive interlock in dimensional analysis, and intensive (averaging) structures. The second illustrates a nontrivial behavioral example using both extensive and conjoint measurement plus functional equations to arrive at rank and signdependent utility (also called cumulative prospect) representations for decision making under risk. The third section, contemporary representational measurement, somewhat overlaps the classical one but includes new findings and approaches: representations of nonadditive concatenation and conjoint structures; a general theory of scale types; results for general, finitely unique, homogeneous structures; structures that are homogeneous between singular points; generalized distributive triples; and a generalization of dimensional analysis to include any ratio scalable attribute; and the concept of meaningfulness. The final section concerns applications of the latter ideas to psychophysical scaling and merging functions.] 1996 Academic Press, Inc. 1.
Lower Partial Moments As Measures of Perceived Risk  An Experimental Study
, 1998
"... The paper reports the results of an experiment on individual investors’ risk perception in a stock market context under two different modes of information presentation (framings). While the concentration on two moments of a return distribution has been a cornerstone of neoclassic finance theory fro ..."
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The paper reports the results of an experiment on individual investors’ risk perception in a stock market context under two different modes of information presentation (framings). While the concentration on two moments of a return distribution has been a cornerstone of neoclassic finance theory from the start (Markowitz 1952) an alternative’s mean and variance have been selected more by convenience and ease of computation than by theoretical or empirical justification. Even though the most influential models are based on variance as risk measure there has always been much discontent with this proposal. The symmetrical nature of variance does not capture the common notion of risk as something undesired, e. g. negative deviations from a reference point. Instead, lower partial moments (LPM) seem to be more appropriate for measuring risk. The purpose of this paper is to examine experimentally private investors’ risk perception in a financial context. The focus is on the correspondence of people’s risk perceptions with specific LPMs. The main findings can be summarized as follows. First, symmetrical risk measures like variance can be clearly dismissed in favor of shortfall measures like LPMs. Second, the reference point (target) of individuals for defining losses is not a distribution’s mean but the initial price in a time series of stock prices. Third, the LPM which explains risk perception best is the LPM0, i. e. the probability of loss. Fourth,
Moderation of preference reversals in the long run
 Journal of Experimental Psychology: Human Perception and Performance
, 1990
"... This study explored how preference reversals, induced by changes in response mode (choice vs. pricing), are moderated by how lotteries are represented, as being played 1, 10, or 100 times. Ss chose which of a pair of gambles they preferred to play and determined the minimum selling price of each gam ..."
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This study explored how preference reversals, induced by changes in response mode (choice vs. pricing), are moderated by how lotteries are represented, as being played 1, 10, or 100 times. Ss chose which of a pair of gambles they preferred to play and determined the minimum selling price of each gamble. Replicating previous research, the preference reversal was obtained for singleplay representations: Ss tended to choose the gambles with the higher probabilities of winning, but priced them lower. However, for multipleplay representations, preference reversals were reduced, and consistency between pricing and choice behaviors was increased. Both response modes were sensitive to differences in the expected values of gambles, but sensitivity did not vary significantly with the number of plays. These results support the hypothesis that violations of expected utility theory are reduced for multipleplay gambles. The evaluation of a monetary gamble requires consideration of two basic types of information: (a) the probabilities associated with winning and losing, and (b) the amounts to be won and lost. The welldocumented phenomenon of preference reversals provides strong evidence that the processing of this information depends on how the evaluation is expressed
Dominance Violations in Judged Prices of Two and Threeoutcome Gambles
"... The dominance principle states that one should prefer the option with consequences that are at least as good as those of other options for any state of the world. When applied to judged prices of gambles, the dominance principle requires that increasing one or more outcomes of a gamble should increa ..."
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The dominance principle states that one should prefer the option with consequences that are at least as good as those of other options for any state of the world. When applied to judged prices of gambles, the dominance principle requires that increasing one or more outcomes of a gamble should increase the judged price of the gamble, with everything else held constant. Previous research has uncovered systematic violations of the dominance principle: people assign higher prices to a gamble with a large probability of winning an amount, Y, otherwise zero, than they do to a superior gamble with the same chance of winning Y, otherwise winning a small amount, X! These violations can be explained by a configuralweight theory in which twooutcome gambles are represented with two sets of decision weights; one set for outcomes having values of zero and another set for lowervalued outcomes that have nonzero values. The present paper investigates whether dominance violations are limited to twooutcome gambles. Results show that people violate the dominance principle with threeoutcome gambles even with financial incentives. Furthermore, results could be predicted from the configuralweight theory. The data do not support the view that configural weighting is caused by a shift in strategy that would apply only to twooutcome gambles. KEY WORDS dominance principle; twooutcome gambles; threeoutcome gambles; configuralweight theory
Asian Journal of Social Psychology (2003), 6, 117132. Risk Perception and Risky Choice: Situational, Informational, and Dispositional Effects
"... Correspondence concerning this article should be addressed to X.T. Wang, Psychology Department, ..."
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Correspondence concerning this article should be addressed to X.T. Wang, Psychology Department,
A Theory of Perceived Risk . . .
, 1992
"... People judged both the attractiveness and risk of lotteries to win or lose money. The lotteries were designed to test whether risk and attractiveness judgments show systematic deviations from the simple sum of probabilitybyutilityproducts analogous to (S)EU theory. Our results led to an alternativ ..."
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People judged both the attractiveness and risk of lotteries to win or lose money. The lotteries were designed to test whether risk and attractiveness judgments show systematic deviations from the simple sum of probabilitybyutilityproducts analogous to (S)EU theory. Our results led to an alternative combination rule for probability and outcome information, with a relative weight averaging component and a configural (i.e., sign or rankdependent) probability weighting component. Ratings of risk and attractiveness were negatively correlated, but the two tasks showed systematic differences in the rank order of judgments. Both judgments could be tit by the same configural relative weight averaging model, but with different parameters (especially the signdependent probability weighting functions). Risk judgments were more sensitive to the probability of losses and zero outcomes compared to attractiveness judgments, which were more sensitive to the probability of gains. There were individual differences on the extent of this difference in probability weights between risk and attractiveness judgments.
Risk Perception and Acceptance— One Process or Two? The Impact of Aspirations on Perceived Risk
"... Abstract. The experiments discussed here are aimed at determining whether risk perception and risk acceptance are two distinct psychological processes. This study is motivated by the idea of a doublecriterion model of choice. In particular, in line with riskvalue (RV) models, in which risk is tre ..."
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Abstract. The experiments discussed here are aimed at determining whether risk perception and risk acceptance are two distinct psychological processes. This study is motivated by the idea of a doublecriterion model of choice. In particular, in line with riskvalue (RV) models, in which risk is treated as a primitive, it is tested whether risk is independent of aspirations and whether preferences depend on aspirations. In two experiments, 305 university students were presented with pairs of risky projects and were asked to compare their riskiness and select one. The aspiration level, defined as the target return on the project, was set through an explicit instruction. In Experiment 1, a withinsubject design was applied, and thus aspirations were set at two different levels. In Experiment 2, with a betweensubject design, two different aspiration levels were set for each group. The results indicate that risk ordering is insensitive to changes in aspirations, but preferences are sensitive to those changes. This supports distinctness of risk perception and risk acceptance. The findings are discussed in terms of the CPT and SP/A models and the RV approach. It appears that doublecriterion models provide better and psychologically sounder predictions of subjects ’ preferences.