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Stochastic Choice Under Risk

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  • Pavlo R. Blavatskyy
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    Abstract

    An individual makes random errors when evaluating the expected utility of a risky lottery. Errors are symmetrically distributed around zero as long as an individual does not make transparent mistakes such as choosing a risky lottery over its highest possible outcome for certain. This stochastic decision theory explains many well-known violations of expected utility theory such as the fourfold pattern of risk attitudes, the discrepancy between certainty equivalent and probability equivalent elicitation methods, the preference reversal phenomenon, the generalized common consequence effect (the Allais paradox), the common ratio effect and the violations of the betweenness.

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    Bibliographic Info

    Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 272.

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    Date of creation: Feb 2006
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    Handle: RePEc:zur:iewwpx:272

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    Keywords: expected utility theory; stochastic utility; Fechner model; random error; risk;

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    Cited by:
    1. Pavlo Blavatskyy, 2007. "Stochastic expected utility theory," Journal of Risk and Uncertainty, Springer, Springer, vol. 34(3), pages 259-286, June.

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