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Testing models of stochastic choice in health state valuation data

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  • Paul Dolan
  • Oyeyemi Oluboyede
  • Jennifer Roberts

    ()
    (Department of Economics, The University of Sheffield)

Abstract

Expected Utility (EU) theory is the standard economic model of individual preferences under uncertainty. However, observed violations of the axioms of EU have generated interest in the incorporation of a stochastic element into deterministic models of decision-making. Previous empirical investigation of the theories of stochastic choice has involved monetary gambles in risky conditions using convenience samples of students. The aim of this study is to test generalisations of these models in the context of eliciting the preferences of the general public over health states under conditions of certainty. Our findings lend support to the `white noise´ stochastic specification of Hey and Orme (1994) which indicates that the stronger the preferences of an individual, the less likely they are to make a mistake and attach a lower value to their truly preferred alternative. JEL Classification: D0 Key words: Stochastic preferences, utility assessment, expected utility theory.

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Bibliographic Info

Paper provided by The University of Sheffield, Department of Economics in its series Working Papers with number 2005017.

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Length: 22 pages
Date of creation: Nov 2005
Date of revision: Nov 2005
Handle: RePEc:shf:wpaper:2005017

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Keywords: Stochastic preferences; utility assessment; expected theory;

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  1. 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.
  2. Selten, Reinhard & Joachim Buchta, 1994. "Experimental Sealed Bid First Price Auctions with Directly Observed Bid Functions," Discussion Paper Serie B 270, University of Bonn, Germany.
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