How Categorization Shapes the Probability Weighting Function

The shape of the probability weighting function is one of the most well-known empirical observations in judgment and decision-making research. The tendency to overweight low probability events and underweight high probability events stems from the categorical distinction between “not happening,” “a chance," and “happening." We demonstrate that individuals categorize uncertainty differently across contexts (e.g., numeric risks vs. verbal labels of uncertainty). These categorical perceptions produce additional reference points in the probability space. The resulting behavioral patterns necessitate revising the traditional inverse-S shaped probability weighting function. Using experimental and model-based approaches, we demonstrate that probability sensitivity, and thus the shape of the probability weighting function, depends crucially on how decision-makers represent categories of uncertainty. ∗Rotterdam School of Management, Erasmus University, schley@rsm.nl †Amsterdam School of Communication Research, University of Amsterdam, h.y.chan@uva.nl ‡ESADE, Universitat Ramon Llull, manissa.gunadi@esade.edu §Rotterdam School of Management, Erasmus University, ferecatu@rsm.nl