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Models of stochastic choice and decision theories: why both are important for analyzing decisions

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Author Info

  • Pavlo R. Blavatskyy

    (Institute of Public Finance, University of Innsbruck, Innsbruck, Austria)

  • Ganna Pogrebna

    (Columbia University, Institute for Social and Economic Research and Policy, New York, USA)

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    Abstract

    We select a menu of seven popular decision theories and embed each theory in five models of stochastic choice, including tremble, Fechner and random utility model. We find that the estimated parameters of decision theories differ significantly when theories are combined with different models. Depending on the selected model of stochastic choice we obtain different rankings of decision theories with regard to their goodness of fit to the data. The fit of all analyzed decision theories improves significantly when they are embedded in a Fechner model of heteroscedastic truncated errors or a random utility model. Copyright © 2009 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/jae.1116
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    File URL: http://qed.econ.queensu.ca:80/jae/2010-v25.6/
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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

    Volume (Year): 25 (2010)
    Issue (Month): 6 ()
    Pages: 963-986

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    Handle: RePEc:jae:japmet:v:25:y:2010:i:6:p:963-986

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    References

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    1. Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 167-96, March.
    2. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    3. Chew, Soo Hong, 1983. "A Generalization of the Quasilinear Mean with Applications to the Measurement of Income Inequality and Decision Theory Resolving the Allais Paradox," Econometrica, Econometric Society, vol. 51(4), pages 1065-92, July.
    4. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November.
    5. Hey, John D., 1995. "Experimental investigations of errors in decision making under risk," European Economic Review, Elsevier, vol. 39(3-4), pages 633-640, April.
    6. Fishburn, Peter C., 1983. "Transitive measurable utility," Journal of Economic Theory, Elsevier, vol. 31(2), pages 293-317, December.
    7. Pavlo Blavatskyy & Ganna Pogrebna, 2008. "Risk Aversion when Gains are Likely and Unlikely: Evidence from a Natural Experiment with Large Stakes," Theory and Decision, Springer, vol. 64(2), pages 395-420, March.
    8. Abdellaoui, Mohammed & Barrios, Carolina & Wakker, Peter P., 2007. "Reconciling introspective utility with revealed preference: Experimental arguments based on prospect theory," Journal of Econometrics, Elsevier, vol. 138(1), pages 356-378, May.
    9. Camerer, Colin F, 1989. " An Experimental Test of Several Generalized Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 61-104, April.
    10. David Buschena & David Zilberman, 2008. "Generalized expected utility, heteroscedastic error, and path dependence in risky choice," Journal of Risk and Uncertainty, Springer, vol. 36(2), pages 201-201, April.
    11. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
    12. Pavlo Blavatskyy, 2007. "Stochastic expected utility theory," Journal of Risk and Uncertainty, Springer, vol. 34(3), pages 259-286, June.
    13. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
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    15. Loomes, G. & Moffatt, P.G. & Sugden, R., 1998. "A Microeconometric Test of Alternative Stochastic Theories of Risky Choice," University of East Anglia Discussion Papers in Economics 9806, School of Economics, University of East Anglia, Norwich, UK..
    16. John Hey, 2005. "Why We Should Not Be Silent About Noise," Experimental Economics, Springer, vol. 8(4), pages 325-345, December.
    17. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
    18. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May.
    19. Quiggin, John & Horowitz, John, 1995. "Time and Risk," Journal of Risk and Uncertainty, Springer, vol. 10(1), pages 37-55, January.
    20. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
    21. Starmer, Chris & Sugden, Robert, 1989. " Probability and Juxtaposition Effects: An Experimental Investigation of the Common Ratio Effect," Journal of Risk and Uncertainty, Springer, vol. 2(2), pages 159-78, June.
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    Cited by:
    1. Pavlo Blavatskyy, 2014. "Stronger utility," Theory and Decision, Springer, vol. 76(2), pages 265-286, February.
    2. 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.
    3. Guido Baltussen & G. Post & Martijn Assem & Peter Wakker, 2012. "Random incentive systems in a dynamic choice experiment," Experimental Economics, Springer, vol. 15(3), pages 418-443, September.
    4. Andrew Caplin & Mark Dean & Daniel Martin, 2011. "Search and Satisficing," American Economic Review, American Economic Association, vol. 101(7), pages 2899-2922, December.
    5. Blavatskyy, Pavlo R., 2012. "Utility of a quarter-million," Economics Letters, Elsevier, vol. 117(3), pages 650-653.

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