Axiomatization of Stochastic Models for Choice under Uncertainty
AbstractThis paper develops a theory of probabilistic models for risky choices. Part of this theory can be viewed as an extension of the expected utility theory to account for bounded rationality. One probabilistic version of the Archimedean Axiom and two versions of the Independence Axiom are proposed. In addition, additional axioms are proposed of which one is Luce’s Independence from Irrelevant Alternatives. It is demonstrated that different combinations of the axioms yield different characterizations of the probabilities for choosing the respective risky prospects. An interesting feature of the models developed is that they allow for violations of the expected utility theory known as the common consequence effect and the common ratio effect.
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Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 465.
Date of creation: Jul 2006
Date of revision:
Random tastes; bounded rationality; independence from irrelevant alternatives; probabilistic choice among lotteries; Allais paradox.;
Other versions of this item:
- Dagsvik, John K., 2008. "Axiomatization of stochastic models for choice under uncertainty," Mathematical Social Sciences, Elsevier, vol. 55(3), pages 341-370, May.
- C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-30 (All new papers)
- NEP-DCM-2006-09-30 (Discrete Choice Models)
- NEP-UPT-2006-09-30 (Utility Models & Prospect Theory)
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