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Stochastic Expected Utility and Prospect Theory in a Horse Race: A Finite Mixture Approach

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  • Adrian Bruhin

    ()
    (Socioeconomic Institute, University of Zurich)

Abstract

This study compares the performance of Prospect Theory versus Stochastic Expected Utility Theory at fitting data on decision making under risk. Both theories incorporate well-known deviations from Expected Utility Maximization such as the Allais paradox or the fourfold pattern of risk attitudes. Stochastic Expected Utility Theory parsimoniously extends the standard microeconomic model, whereas Prospect Theory, the benchmark for aggregate choice so far, is based on psychological findings. First, the two theories' fit to representative choice is assessed for two experimental data sets, one Swiss and one Chinese. In a second step, finite mixture regressions reveal a consistent mix of two different behavioral types suggesting that researchers may take individual heterogeneity into account in order to avoid aggregation bias.

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File URL: http://www.soi.uzh.ch/research/wp/2008/wp0803.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0803.

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Length: 25 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:soz:wpaper:0803

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Keywords: stochastic expected etility theory; prospect theory; finite mixture models;

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References

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Citations

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Cited by:
  1. Maurus Rischatsch, 2009. "Simulating WTP Values from Random-Coefficient Models," SOI - Working Papers 0912, Socioeconomic Institute - University of Zurich.
  2. Donja Darai & Dario Sacco & Armin Schmutzler, 2010. "Competition and innovation: an experimental investigation," Experimental Economics, Springer, vol. 13(4), pages 439-460, December.
  3. Maurus Rischatsch & Maria Trottmann, 2009. "Physician dispensing and the choice between generic and brand-name drugs – Do margins affect choice?," SOI - Working Papers 0911, Socioeconomic Institute - University of Zurich.
  4. Josef Falkinger, 2008. "Between Agora and Shopping Mall," SOI - Working Papers 0805, Socioeconomic Institute - University of Zurich.
  5. Dario Sacco & Armin Schmutzler, 2008. "All-Pay Auctions with Negative Prize Externalities: Theory and Experimental Evidence," SOI - Working Papers 0806, Socioeconomic Institute - University of Zurich.
  6. Andreas Polk & Armin Schmutzler & Adrian Muller, 2010. "Lobbying and the Power of Multinational Firms," SOI - Working Papers 1008, Socioeconomic Institute - University of Zurich.
  7. Ilja Neustadt & Peter Zweifel, 2009. "Economic Well-Being, Social Mobility, and Preferences for Income Redistribution: Evidence from a Discrete Choice Experiment," SOI - Working Papers 0909, Socioeconomic Institute - University of Zurich, revised Jan 2010.

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