Efficient robust elicitation of individual utility and decision weight functions

Abstract: In choice under risk an individual decision making is typically described by an individual's utility function over monetary outcomes and an individual’s decision weight function over probabilities. A three-stage procedure is proposed for efficient robust nonparametric elicitation of these functions. First, a tradeoff method is used to elicit several probabilities with a known individual’s decision weight. Second, these probabilities are used as input for a certainty equivalent method to elicit an individual’s utility function. Third, an elicited individual’s utility function is used as input for a probability equivalent method to elicit an individual’s decision weight function. This elicitation procedure is robust in a sense that it is not affected by individual’s nonlinear weighting of probabilities. Additionally, this elicitation procedure is optimally efficient in a sense that it has a much slower speed of error propagation (though not necessary lower errors) than other available methods.