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  5. Simplicity and Probability Weighting in Choice under Risk

AEA Papers and Proceedings

ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)

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Simplicity and Probability Weighting in Choice under Risk

  • Drew Fudenberg
  • Indira Puri
AEA Papers and Proceedings
vol. 112, May 2022
(pp. 421–25)
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Abstract

We present a speculative application of model estimates from Fudenberg and Puri (2021) to prize-linked savings in South Africa. The models used include one combining simplicity theory (Puri 2018, 2022), a preference for lotteries with fewer possible outcomes, with cumulative prospect theory. The results and those of prior literature indicate that both simplicity and probability weighting have a role to play in understanding behavior in choice under risk. We discuss the properties of these models and their implications for behavior.

Citation

Fudenberg, Drew, and Indira Puri. 2022. "Simplicity and Probability Weighting in Choice under Risk." AEA Papers and Proceedings, 112: 421–25. DOI: 10.1257/pandp.20221091

Additional Materials

JEL Classification

  • D44 Auctions
  • D81 Criteria for Decision-Making under Risk and Uncertainty
  • D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
  • O12 Microeconomic Analyses of Economic Development