A Model of Probabilistic Choice Satisfying First-Order Stochastic Dominance
AbstractThis paper presents a new model of probabilistic binary choice under risk. In this model, a decision maker always satisfies first-order stochastic dominance. If neither lottery stochastically dominates the other alternative, a decision maker chooses in a probabilistic manner. The proposed model is derived from four standard axioms (completeness, weak stochastic transitivity, continuity, and common consequence independence) and two relatively new axioms. The proposed model provides a better fit to experimental data than do existing models. The baseline model can be extended to other domains such as modeling variable consumer demand. This paper was accepted by Peter Wakker, decision analysis.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 57 (2011)
Issue (Month): 3 (March)
probabilistic choice; first-order stochastic dominance; random utility; strong utility;
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- David Butler & Andrea Isoni & Graham Loomes, 2012. "Testing the ‘standard’ model of stochastic choice under risk," Journal of Risk and Uncertainty, Springer, vol. 45(3), pages 191-213, December.
- Blavatskyy, Pavlo R., 2012. "Probabilistic subjective expected utility," Journal of Mathematical Economics, Elsevier, vol. 48(1), pages 47-50.
- Blavatskyy, Pavlo, 2013. "Which decision theory?," Economics Letters, Elsevier, vol. 120(1), pages 40-44.
- Pavlo Blavatskyy, 2014. "Stronger utility," Theory and Decision, Springer, vol. 76(2), pages 265-286, February.
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