When Risk Perception Gets in the Way: Probability Weighting and Underprevention

Published Online:https://doi.org/10.1287/opre.2019.1910

References

  • Abdellaoui M (2000) Parameter-free elicitation of utility and probability weighting functions. Management Sci. 46(11):1497–1512.LinkGoogle Scholar
  • Abdellaoui M, Kemel E (2013) Eliciting prospect theory when consequences are measured in time units: “Time is not money.” Management Sci. 60(7):1844–1859.LinkGoogle Scholar
  • Abdellaoui M, L’Haridon O, Paraschiv C (2011a) Experienced vs. described uncertainty: Do we need two prospect theory specifications? Management Sci. 57(10):1879–1895.LinkGoogle Scholar
  • Abdellaoui M, Vossmann F, Weber M (2005) Choice-based elicitation and decomposition of decision weights for gains and losses under uncertainty. Management Sci. 51(9):1384–1399.LinkGoogle Scholar
  • Abdellaoui M, Baillon A, Placido L, Wakker PP (2011b) The rich domain of uncertainty: Source functions and their experimental implementation. Amer. Econom. Rev. 101(2):695–723.CrossrefGoogle Scholar
  • Acemoglu D, Autor D (2011) Skills, tasks and technologies: Implications for employment and earnings. Ashenfelter O, Card D, eds. Handbook of Labor Economics, vol. 4. (Elsevier, Amsterdam), 1043–1171.Google Scholar
  • Alary D, Gollier C, Treich N (2013) The effect of ambiguity aversion on insurance and self-protection. Econom. J. 123(573):1188–1202.Google Scholar
  • Andersen S, Harrison GW, Rutström EE (2006) Choice behavior, asset integration and natural reference points. Working Paper 06, Copenhagen Business School, Copenhagen.Google Scholar
  • Arrow KJ (1951) Alternative approaches to the theory of choice in risk-taking situations. Econometrica 19(4):404–437.CrossrefGoogle Scholar
  • Arrow KJ (1963) Uncertainty and the welfare economics of medical care. Amer. Econom. Rev. 53(5):941–973.Google Scholar
  • Arrow KJ (1971) The theory of risk aversion. Essays in the Theory of Risk-Bearing (Markham Publishing Co, Chicago), 90–120.Google Scholar
  • Arrow KJ (1982) Risk perception in psychology and economics. Econom. Inquiry 20(1):1–9.CrossrefGoogle Scholar
  • Arrow KJ, Hurwicz L (1972) An optimality criterion for decision-making under ignorance. Carter CF, Ford JL, eds. Uncertainty and Expectations in Economics (Basil Blackwell & Mott Ltd, Oxford, UK), 1–11.Google Scholar
  • Baillon A, Bleichrodt H, Keskin U, l’Haridon O, Li C (2017) The effect of learning on ambiguity attitudes. Management Sci. 64(5):2181–2198.LinkGoogle Scholar
  • Barseghyan L, Molinari F, O’Donoghue T, Teitelbaum JC (2013) The nature of risk preferences: Evidence from insurance choices. Amer. Econom. Rev. 103(6):2499–2529.CrossrefGoogle Scholar
  • Berger L, Emmerling J, Tavoni M (2016) Managing catastrophic climate risks under model uncertainty aversion. Management Sci. 63(3):749–765.LinkGoogle Scholar
  • Berns GS, Capra CM, Moore S, Noussair C (2007) A shocking experiment: New evidence on probability weighting and common ratio violations. Judgment Decision Making 2(4):234–242.Google Scholar
  • Bleichrodt H, Eeckhoudt L (2006) Willingness to pay for reductions in health risks when probabilities are distorted. Health Econom. 15(2):211–214.CrossrefGoogle Scholar
  • Booij AS, Van Praag BM, Van De Kuilen G (2010) A parametric analysis of prospect theory’s functionals for the general population. Theory Decision 68(1-2):115–148.CrossrefGoogle Scholar
  • Camerer C (1989) An experimental test of several generalized utility theories. J. Risk Uncertainity 2(1):61–104.CrossrefGoogle Scholar
  • Center for Disease Control and Prevention (2015) 2014 Behavioral risk factor surveillance system survey data. Accessed August 5, 2018, https://www.cdc.gov/brfss/annual_data/annual_2014.html.Google Scholar
  • Charupat N, Deaves R, Derouin T, Klotzle M, Miu P (2013) Emotional balance and probability weighting. Theory Decision 75(1):17–41.CrossrefGoogle Scholar
  • Chateauneuf A, Eichberger J, Grant S (2007) Choice under uncertainty with the best and worst in mind: Neo-additive capacities. J. Econom. Theory 137(1):538–567.CrossrefGoogle Scholar
  • Chetty R, Hendren N, Kline P, Saez E, Turner N (2014) Is the United States still a land of opportunity? Recent trends in intergenerational mobility. Amer. Econom. Rev. 104(5):141–147.CrossrefGoogle Scholar
  • Chetty R, Grusky D, Hell M, Hendren N, Manduca R, Narang J (2017) The fading American dream: Trends in absolute income mobility since 1940. Science 356(6336):398–406.CrossrefGoogle Scholar
  • Cohen J, Dupas P (2010) Free distribution or cost-sharing? Evidence from a randomized malaria prevention experiment. Quart. J. Econom. 125(1):1–45.CrossrefGoogle Scholar
  • Cohen M (1992) Security level, potential level, expected utility: A three-criteria decision model under risk. Theory Decision 33(2):101–134.CrossrefGoogle Scholar
  • Courbage C, Loubergé H, Peter R (2017) Optimal prevention for multiple risks. J. Risk Insurance 84(3):899–922.CrossrefGoogle Scholar
  • Cutler DM, Zeckhauser RJ (2000) The anatomy of health insurance. Culyer AJ, Newhouse JP, eds. Handbook of Health Economics, vol. 1 (Elsevier, Amsterdam), 563–643.Google Scholar
  • Dionne G (1982) Moral hazard and state-dependent utility function. J. Risk Insurance 49(3):405–422.CrossrefGoogle Scholar
  • Donkers B, Melenberg B, Van Soest A (2001) Estimating risk attitudes using lotteries: A large sample approach. J. Risk Uncertainity 22(2):165–195.CrossrefGoogle Scholar
  • Eeckhoudt L, Hammitt J (2001) Background risks and the value of a statistical life. J. Risk Uncertainity 23(3):261–279.CrossrefGoogle Scholar
  • Ehrlich I, Becker GS (1972) Market insurance, self-insurance, and self-protection. J. Political Econom. 80(4):623–648.CrossrefGoogle Scholar
  • Ellsberg D (1961) Risk, ambiguity, and the Savage axioms. Quart. J. Econom. 75(4):643–669.CrossrefGoogle Scholar
  • Epstein LG, Wang T (1994) Intertemporal asset pricing under Knightian uncertainty. Econometrica 62(2):283–322.CrossrefGoogle Scholar
  • Etchart-Vincent N (2004) Is probability weighting sensitive to the magnitude of consequences? An experimental investigation on losses. J. Risk Uncertainty 28(3):217–235.CrossrefGoogle Scholar
  • Etchart-Vincent N (2009) Probability weighting and the ‘level’ and ‘spacing’ of outcomes: An experimental study over losses. J. Risk Uncertainty 39(1):45–63.CrossrefGoogle Scholar
  • Etner J, Jeleva M (2014) Underestimation of probabilities modifications: Characterization and economic implications. Econom. Theory 56(2):291–307.CrossrefGoogle Scholar
  • Evans W, Viscusi K (1991) Estimation of state-dependent utility functions using survey data. Rev. Econom. Statist. 73(1):94–104.CrossrefGoogle Scholar
  • Fagerlin A, Wang C, Ubel PA (2005) Reducing the influence of anecdotal reasoning on people’s healthcare decisions: Is a picture worth a thousand statistics? Medical Decision Making 25(4):398–405.CrossrefGoogle Scholar
  • Fehr-Duda H, Gennaro M, Schubert R (2006) Gender, financial risk, and probability weights. Theory Decision 60(2-3):283–313.CrossrefGoogle Scholar
  • Fehr-Duda H, Bruhin A, Epper T, Schubert R (2010) Rationality on the rise: Why relative risk aversion increases with stake size. J. Risk Uncertainity 40(2):147–180.CrossrefGoogle Scholar
  • Finkelstein A, Luttmer E, Notowidigdo M (2013) What good is wealth without health? The effect of health on the marginal utility of consumption. J. Eur. Econom. Assoc. 11(suppl 1):221–258.Google Scholar
  • Finkelstein A, Taubman S, Wright B, Bernstein M, Gruber J, Newhouse JP, Allen H, Baicker K; Oregon Health Study Group (2012) The Oregon health insurance experiment: Evidence from the first year. Quart. J. Econom. 127(3):1057–1106.CrossrefGoogle Scholar
  • Gandini S, Botteri E, Iodice S, Boniol M, Lowenfels AB, Maisonneuve P, Boyle P (2008) Tobacco smoking and cancer: A meta-analysis. Internat. J. Cancer 122(1):155–164.CrossrefGoogle Scholar
  • Ghirardato P, Maccheroni F, Marinacci M (2004) Differentiating ambiguity and ambiguity attitude. J. Econom. Theory 118(2):133–173.CrossrefGoogle Scholar
  • Gigerenzer G, Hoffrage U (1995) How to improve Bayesian reasoning without instruction: Frequency formats. Psych. Rev. 102(4):684–704.CrossrefGoogle Scholar
  • Global Challenges Foundation (2017) Attitudes to global risks and governance. Accessed August 5, 2018, https://api.globalchallenges.org/static/files/ComRes.pdf.Google Scholar
  • Goldstein WM, Einhorn H (1987) Expression theory and the preference reversal phenomena. Psych. Rev. 94(2):236–254.CrossrefGoogle Scholar
  • Gonzalez R, Wu G (1999) On the shape of the probability weighting function. Cognitive Psych. 38(1):129–166.CrossrefGoogle Scholar
  • Harrison GW, Rutström EE (2009) Expected utility theory and prospect theory: One wedding and a decent funeral. Experiment. Econom. 12(2):133–158.CrossrefGoogle Scholar
  • Hofmann A, Peter R (2015) Multivariate prevention decisions: Safe today or sorry tomorrow? Econom. Lett. 128:51–53.CrossrefGoogle Scholar
  • Howlader N, Noone A, Krapcho M, Miller D, Bishop K, Kosary C, Yu M, et al.. (2017) SEER cancer statistics review, 1975-2014. Technical report, National Cancer Institute, Bethesda, MD.Google Scholar
  • Intergovernmental Panel on Climate Change (2013) Climate Change 2013 (Cambridge University Press, Cambridge, United Kingdom).Google Scholar
  • Jaspersen JG, Richter A (2015) The wealth effects of premium subsidies on moral hazard in insurance markets. Eur. Econom. Rev. 77:139–153.CrossrefGoogle Scholar
  • Jones-Lee M (1974) The value of changes in the probability of death or injury. J. Political Econom. 82(4):835–849.CrossrefGoogle Scholar
  • Kahneman D, Tversky A (1979) Prospect theory: An analysis of decision under risk. Econometrica 47(2):263–291.CrossrefGoogle Scholar
  • Keeney RL (2008) Personal decisions are the leading cause of death. Oper. Res. 56(6):1335–1347.LinkGoogle Scholar
  • Kemel E, Paraschiv C (2013) Prospect theory for joint time and money consequences in risk and ambiguity. Transportation Res. Part B: Methodological 56:81–95.CrossrefGoogle Scholar
  • Kemel E, Paraschiv C (2018) Deciding about human lives: An experimental measure of risk attitudes under prospect theory. Soc. Choice Welfare 51(1):163–192.CrossrefGoogle Scholar
  • Klibanoff P, Marinacci M, Mukerji S (2005) A smooth model of decision making under ambiguity. Econometrica 73(6):1849–1892.CrossrefGoogle Scholar
  • Kliger D, Levy O (2008) Mood impacts on probability weighting functions:“large-gamble” evidence. J. Socio-Economics 37(4):1397–1411.CrossrefGoogle Scholar
  • Kőszegi B, Rabin M (2007) Reference-dependent risk attitudes. Amer. Econom. Rev. 97(4):1047–1073.CrossrefGoogle Scholar
  • Lattimore P, Baker J, Witte A (1992) The influence of probability on risky choice: A parametric examination. J. Econom. Behav. Organ. 17(3):377–400.CrossrefGoogle Scholar
  • Lhachimi SK, Nusselder WJ, Smit HA, Van Baal P, Baili P, Bennett K, Fernández E, et al.. (2012) DYNAMO-HIA: A dynamic modeling tool for generic health impact assessments. PLoS One 7(5):e33317.CrossrefGoogle Scholar
  • l’Haridon O, Vieider FM (2019) All over the map: A worldwide comparison of risk preferences. Quant. Econom. 10(1):185–215.CrossrefGoogle Scholar
  • Loomes G, Moffatt P, Sugden R (2002) A microeconometric test of alternative stochastic theories of risky choice. J. Risk Uncertainty 24(2):103–130.CrossrefGoogle Scholar
  • Menegatti M (2009) Optimal prevention and prudence in a two-period model. Math. Social Sci. 58(3):393–397.CrossrefGoogle Scholar
  • Mozaffarian D, Benjamin EJ, Go AS, Arnett DK, Blaha MJ, Cushman M, De Ferranti S, et al.. (2015) Heart disease and stroke statistics - 2015 update: A report from the American Heart Association. Circulation 131(4):e29–e322.Google Scholar
  • Mullahy J (1999) 2. It’ll only hurt a second? Microeconomic determinants of who gets flu shots. Health Econom. 8(1):9–24.CrossrefGoogle Scholar
  • Ogden CL, Carroll MD, Fryar CD, Flegal KM (2015) Prevalence of Obesity Among Adults and Youth: United States, 2011-2014 (U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics, Hyattsville, MD).Google Scholar
  • Peter R (2017) Optimal self-protection in two periods: On the role of endogenous saving. J. Econom. Behav. Organ. 137:19–36.CrossrefGoogle Scholar
  • Petrova DG, van der Pligt J, Garcia-Retamero R (2014) Feeling the numbers: On the interplay between risk, affect, and numeracy. J. Behav. Decision Making 27(3):191–199.CrossrefGoogle Scholar
  • Prelec D (1998) The probability weighting function. Econometrica 66(3):497–527.CrossrefGoogle Scholar
  • Rheinberger C, Herrera-Araujo D, Hammitt J (2016) The value of disease prevention vs treatment. J. Health Econom. 50:247–255.CrossrefGoogle Scholar
  • Rottenstreich Y, Hsee CK (2001) Money, kisses, and electric shocks: On the affective psychology of risk. Psych. Sci. 12(3):185–190.CrossrefGoogle Scholar
  • Sasco A, Secretan M, Straif K (2004) Tobacco smoking and cancer: A brief review of recent epidemiological evidence. Lung Cancer 45(2):S3–S9.CrossrefGoogle Scholar
  • Seog SH (2012) Moral hazard and health insurance when treatment is preventive. J. Risk Insurance 79(4):1017–1038.CrossrefGoogle Scholar
  • Sloan F, Viscusi K, Chesson H, Conover C, Whetten-Goldstein K (1998) Alternative approaches to valuing intangible health losses: The evidence for multiple sclerosis. J. Health Econom. 17(4):475–497.CrossrefGoogle Scholar
  • Smerecnik CMR, Mesters I, Kessels LTE, Ruiter RAC, De Vries NK, De Vries H (2010) Understanding the positive effects of graphical risk information on comprehension: Measuring attention directed to written, tabular, and graphical risk information. Risk Anal. 30(9):1387–1398.CrossrefGoogle Scholar
  • Snow A (2011) Ambiguity aversion and the propensities for self-insurance and self-protection. J. Risk Uncertainty 42(1):27–43.CrossrefGoogle Scholar
  • Surgeon General (2014) The health consequences of smoking—50 years of progress. Technical report, U.S. Department of Health and Human Services, Atlanta.Google Scholar
  • Tanaka T, Camerer CF, Nguyen Q (2010) Risk and time preferences: Linking experimental and household survey data from Vietnam. Amer. Econom. Rev. 100(1):557–571.CrossrefGoogle Scholar
  • Teitelbaum J (2007) A unilateral accident model under ambiguity. J. Legal Stud. 36(2):431–477.CrossrefGoogle Scholar
  • Tu Q (2005) Empirical analysis of time preferences and risk aversion. Technical report, Tilburg University, Tilburg, Netherlands.Google Scholar
  • Tversky A, Fox C (1995) Weighing risk and uncertainty. Psych. Rev. 102(2):269–283.CrossrefGoogle Scholar
  • Tversky A, Kahneman D (1992) Advances in prospect theory: Cumulative representation of uncertainty. J. Risk Uncertainty 5(4):297–323.CrossrefGoogle Scholar
  • Tversky A, Wakker P (1995) Risk attitudes and decision weights. Econometrica 63(6):1255–1280.CrossrefGoogle Scholar
  • Van Baal PH, Hoogenveen RT, de Wit AG, Boshuizen HC (2006) Estimating health-adjusted life expectancy conditional on risk factors: Results for smoking and obesity. Population Health Metrics 4(1):14.CrossrefGoogle Scholar
  • Viscusi K, Evans W (1990) Utility functions that depend on health status: Estimates and economic implications. Amer. Econom. Rev. 80(3):353–374.Google Scholar
  • Wakker P (2010) Prospect Theory: For Risk and Ambiguity (Cambridge University Press, Cambridge, UK).CrossrefGoogle Scholar
  • Wakker P, Deneffe D (1996) Eliciting von Neumann-Morgenstern utilities when probabilities are distorted or unknown. Management Sci. 42(8):1131–1150.LinkGoogle Scholar
  • Wakker P, Thaler R, Tversky A (1997) Probabilistic insurance. J. Risk Uncertainty 15(1):7–28.CrossrefGoogle Scholar
  • Wald A (1950) Statistical Decision Functions (Wiley).Google Scholar
  • Wibbenmeyer MJ, Hand MS, Calkin DE, Venn TJ, Thompson MP (2013) Risk preferences in strategic wildfire decision making: A choice experiment with US wildfire managers. Risk Anal. 33(6):1021–1037.CrossrefGoogle Scholar
  • World Health Organization (2018) Global health observatory data repository. Accessed August 5, 2018, http://apps.who.int/gho/data/?theme=main.Google Scholar
  • Wright E (1993) Non-compliance—or how many aunts has Matilda? Lancet 342(8876):909–913.CrossrefGoogle Scholar
  • Wu G, Gonzalez R (1996) Curvature of the probability weighting function. Management Sci. 42(12):1676–1690.LinkGoogle Scholar
INFORMS site uses cookies to store information on your computer. Some are essential to make our site work; Others help us improve the user experience. By using this site, you consent to the placement of these cookies. Please read our Privacy Statement to learn more.