Mixture Models of Choice Under Risk
AbstractThis paper is concerned with estimating preference functionals for choice under risk from the choice behaviour of individuals. We start from the observation that there is heterogeneity in behaviour between individuals and within individuals. By ‘heterogeneity between individuals’ we mean that people are different, not only in terms of which type of preference functional that they have, but also in terms of their parameters for these functionals. By ‘heterogeneity within individuals’ we mean that behaviour may be different even by the same individual for the same choice problem. Given the heterogeneity between individuals, the assumption of a ‘representative agent’ preference functional to represent the preference functional of all individuals may well lead to biased estimates. Given the heterogeneity within individuals, we should think carefully about the source of this heterogeneity and model it appropriately, for otherwise we get biased estimates. We propose solutions to both of these problems, concentrating particularly, but not exclusively, on using a Mixture Model to capture the heterogeneity of preference functionals across individuals.
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 07/06.
Date of creation: Apr 2007
Date of revision:
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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
Phone: (0)1904 323776
Fax: (0)1904 323759
Web page: http://www.york.ac.uk/economics/
More information through EDIRC
errors; expected utility theory; experimental economics; maximum simulated likelihood; mixture models; preference functionals; risky choice; rank dependent expected utility theory; unobserved heterogeneity;
Other versions of this item:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C29 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Other
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- 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-2007-04-28 (All new papers)
- NEP-CBE-2007-04-28 (Cognitive & Behavioural Economics)
- NEP-DCM-2007-04-28 (Discrete Choice Models)
- NEP-ECM-2007-04-28 (Econometrics)
- NEP-EXP-2007-04-28 (Experimental Economics)
- NEP-UPT-2007-04-28 (Utility Models & Prospect Theory)
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