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A Comparison of Five Models that Predict Violations of First-Order Stochastic Dominance in Risky Decision Making

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  • Michael Birnbaum

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    Abstract

    Five descriptive models of risky decision making are tested in this article, including four quantitative models and one heuristic account. Seven studies with 1802 participants were conducted to compare accuracy of predictions to new tests of first order stochastic dominance. Although the heuristic model was a contender in previous studies, it can be rejected by the present data, which show that incidence of violations varies systematically with the probability distribution in the gambles. The majority continues to violate stochastic dominance even when two of three branches have higher consequences in the dominant gamble, and they persist in mixed gambles even when probability to win is higher and probability to lose is lower in the dominant gamble. The transfer of attention exchange model (TAX) was the most accurate model for predicting the results. Copyright Springer Science + Business Media, Inc. 2005

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    File URL: http://hdl.handle.net/10.1007/s11166-005-5103-9
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    Bibliographic Info

    Article provided by Springer in its journal Journal of Risk and Uncertainty.

    Volume (Year): 31 (2005)
    Issue (Month): 3 (December)
    Pages: 263-287

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    Handle: RePEc:kap:jrisku:v:31:y:2005:i:3:p:263-287

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    Web page: http://www.springerlink.com/link.asp?id=100299

    Related research

    Keywords: coalescing; cumulative prospect theory; event-splitting; expected utility; nonexpected utility; rank dependent utility; stochastic dominance;

    References

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    1. Camerer, Colin F & Hogarth, Robin M, 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 7-42, December.
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    15. Starmer, Chris & Sugden, Robert, 1993. " Testing for Juxtaposition and Event-Splitting Effects," Journal of Risk and Uncertainty, Springer, vol. 6(3), pages 235-54, June.
    16. Joao L. Becker & Rakesh K. Sarin, 1987. "Lottery Dependent Utility," Management Science, INFORMS, vol. 33(11), pages 1367-1382, November.
    17. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
    18. Birnbaum, Michael H & Navarrete, Juan B, 1998. "Testing Descriptive Utility Theories: Violations of Stochastic Dominance and Cumulative Independence," Journal of Risk and Uncertainty, Springer, vol. 17(1), pages 49-78, October.
    19. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
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    21. Luce, R Duncan & Fishburn, Peter C, 1991. " Rank- and Sign-Dependent Linear Utility Models for Finite First-Order Gambles," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 29-59, January.
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    Citations

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    Cited by:
    1. Birnbaum, Michael H. & LaCroix, Adam R., 2008. "Dimension integration: Testing models without trade-offs," Organizational Behavior and Human Decision Processes, Elsevier, vol. 105(1), pages 122-133, January.
    2. Birnbaum, Michael H. & Schmidt, Ulrich, 2006. "Empirical Tests of Intransitivity Predicted by Models of Risky Choice," Economics Working Papers 2006,10, Christian-Albrechts-University of Kiel, Department of Economics.
    3. Michael Birnbaum & Ulrich Schmidt, 2010. "Testing transitivity in choice under risk," Theory and Decision, Springer, vol. 69(4), pages 599-614, October.
    4. Michael Birnbaum & Ulrich Schmidt, 2008. "An experimental investigation of violations of transitivity in choice under uncertainty," Journal of Risk and Uncertainty, Springer, vol. 37(1), pages 77-91, August.
    5. G├╝rtler, Marc & Stolpe, Julia, 2011. "Piecewise continuous cumulative prospect theory and behavioral financial engineering," Working Papers IF37V1, Technische Universit├Ąt Braunschweig, Institute of Finance.
    6. Birnbaum, Michael H. & Gutierrez, Roman J., 2007. "Testing for intransitivity of preferences predicted by a lexicographic semi-order," Organizational Behavior and Human Decision Processes, Elsevier, vol. 104(1), pages 96-112, September.
    7. Birnbaum, Michael H., 2006. "Evidence against prospect theories in gambles with positive, negative, and mixed consequences," Journal of Economic Psychology, Elsevier, vol. 27(6), pages 737-761, December.
    8. Marc Rieger & Mei Wang, 2008. "Prospect theory for continuous distributions," Journal of Risk and Uncertainty, Springer, vol. 36(1), pages 83-102, February.

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