Document Type



Edith Cowan University

Place of Publication

Joondalup, Western Australia


Faculty of Business and Public Management


School of Finance and Business Economics


Li, S., & Cheung, Y. (2001). On the evolution of probability-weighting function and its impact on gambling. Joondalup, Australia: Edith Cowan University.


It is well known that individuals treat losses and gains differently and there exists non-linearity in probability. The asymmetry between gains and losses is highlighted by the reflection effect. The non-linearity in probability is described by the curvature of the probability-weighting function. This paper studies the evolution of the probability-weighting function. It is assumed that the probability weighting for an individual follows a mean-reverting stochastic process. The Monte Carlo simulation technique is employed to study the evolution of the weighting function. The evolution of the probability- weighting function implies that an individual does not treat gains or losses consistently over time, this may be due to the change of the individual’s psychological status.