Probability Weighting and Cognitive Ability

Abstract

Probability weighting is a major concept for accommodating systematic departures from expected utility theory. We examine the relation between probability weighting and cognitive ability with two experiments: one recruiting subjects with a large variation in cognitive ability and the other using the within-subject manipulation of time constraints in lottery choices and cognitive tests. We find a significant association between likelihood insensitivity—the cognitive component of probability weighting—and cognitive limitation such that subjects with a lower cognitive score or more interrupted cognition due to time pressure respond less discriminately to intermediate probabilities and more over-sensitively to extreme probabilities. Our findings shed light on the sources of anomalous choices against expected utility theory. This paper was accepted by Yan Chen, behavioral economics and decision analysis.

Decisions Under Uncertainty as Bayesian Inference on Choice Options

“…of the coding process receives support from findings showing that probabilistic sensitivity increases with cognitive ability (Choi et al 2022). The parameter δ determines mostly the elevation of the function, thus governing global optimism/pessimism.…”