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'Stochastically more risk averse:' A contextual theory of stochastic discrete choice under risk

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  • Wilcox, Nathaniel T.

Abstract

Microeconometric treatments of discrete choice under risk are typically homoscedastic latent variable models. Specifically, choice probabilities are given by preference functional differences (given by expected utility, rank-dependent utility, etc.) embedded in cumulative distribution functions. This approach has a problem: Estimated utility function parameters meant to represent agents' degree of risk aversion in the sense of Pratt (1964) do not imply a suggested "stochastically more risk averse" relation within such models. A new heteroscedastic model called "contextual utility" remedies this, and estimates in one data set suggest it explains (and especially predicts) as well as or better than other stochastic models.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 162 (2011)
Issue (Month): 1 (May)
Pages: 89-104

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Handle: RePEc:eee:econom:v:162:y:2011:i:1:p:89-104

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Web page: http://www.elsevier.com/locate/jeconom

Related research

Keywords: Risk More risk averse Discrete choice Stochastic choice Heteroscedasticity;

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