
Charles A. Holt and Susan K. Laury
188
these predictions very far outside of the range of payoff scales considered, since addi-
tional adjustments would likely be necessary to account for nonlinearities.
4.7.2 Probability Weighting and Risk Aversion
One of the key implications of prospect theory is that risk preference can be sensi-
tive to low probabilities, as was documented by Cohen et al. (1985). The intuition is
simple. Suppose a normally risk averse subject is presented with a small, e.g. 0.1, chance
of obtaining a large payoff, e.g. $100. If this low probability is overweighted, then the
subject could exhibit risk preference, which is what ...