Volume 4 Issue 3
Authors: Atsuo MURATA
Abstract: In prospect theory, the non-proportionality of probability weighting function π(p) is assumed. However, this belief is based on the results of a questionnaire survey on the change of risk attitude, which used two extreme probabilities (0.9 and 0.002) of being rewarded. This paper investigated how the probabilities between the two extremes affect decision-making, as this has not been explored previously. An attempt was made to identify the condition of non-proportional property in prospect theory. It was discovered that the p-value differed among the participants when the transition of choice from more certain decision to less certain decision occurred. The p-value was dispersive to a larger extent, and ranged from 0.001% to 70%. This showed that the assumption on non-proportionality in prospect theory is not necessarily universal, and the condition of non-proportionality is ruled, to a large extent, by individual difference.
Keywords: Prospect Theory; Irrationality; Decision Making; Lower Probability of Occurrence; Moderate Probability of Occurrence; Non-Proportionality