Journal article
Probability weighting and L-moments
European Journal of Operational Research, Vol.255(1), pp.103-109
2016
Abstract
Several popular generalizations of expected utility theory - cumulative prospect theory, rank-dependent utility and Yaari's dual model - allow for non-linear transformation of (de-)cumulative probabilities. This paper shows an unexpected connection between probability weighting and the statistical theory of L-moments. Specifically, cubic probability weighting results in a linear tradeoff between the expected value (the first L-moment), Gini (1912) mean difference statistic (the second L-moment, also known as L-scale) and the third L-moment (measuring skewness). Inverse S-shaped probability weighting function crossing the 45° line at a probability ≤0.5 reflects an aversion to the dispersion of outcomes and an attraction to positively skewed distributions.
Details
- Title
- Probability weighting and L-moments
- Authors/Creators
- P. Blavatskyy (Author/Creator) - Murdoch University
- Publication Details
- European Journal of Operational Research, Vol.255(1), pp.103-109
- Publisher
- Elsevier BV
- Identifiers
- 991005544486107891
- Copyright
- © 2016 Elsevier B.V.
- Murdoch Affiliation
- School of Business and Governance
- Language
- English
- Resource Type
- Journal article
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