Violations of coalescing in parametric utility measurement

Abstract

AbstractThe majority consensus in the empirical literature is that probability weighting functions are typically inverse-S shaped, that is, people tend to overweight small and underweight large probabilities. A separate stream of literature has reported event-splitting effects (also called violations of coalescing) and shown that they can explain violations of expected utility. This leads to the questions whether (1) the observed shape of weighting functions is a mere consequence of the coalesced presentation and, more generally, whether (2) preference elicitation should rely on presenting lotteries in a canonical split form instead of the commonly used coalesced form. We analyze data from a binary choice experiment where all lottery pairs are presented in both split and coalesced forms. Our results show that the presentation in a split form leads to a better fit of expected utility theory and to probability weighting functions that are closer to linear. We thus provide some evidence that the extent of probability weighting is not an ingrained feature, but rather a result of processing difficulties.