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Models of Stochastic Choice and Decision Theories: Why Both are Important for Analyzing Decisions

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  • Pavlo Blavatskyy
  • Ganna Pogrebna
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    Abstract

    Economic research offers two traditional ways of analyzing decision making under risk. One option is to compare the goodness of fit of different decision theories using the same model of stochastic choice. An alternative way is to vary models of stochastic choice combining them with only one or two decision theories. This paper proposes to look at the bigger picture by comparing different combinations of decision theories and models of stochastic choice. We select a menu of seven popular decision theories and embed each theory in five models of stochastic choice including tremble, Fechner and random utility model. We find that the estimated parameters of decision theories differ significantly when theories are combined with different models. Depending on the selected model of stochastic choice we obtain different ranking of decision theories with regard to their goodness of fit to the data. The fit of all analyzed decision theories improves significantly when they are embedded in a Fechner model of heteroscedastic truncated errors (or random utility model in a dynamic decision problem).

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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 319.

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    Date of creation: Apr 2007
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    Handle: RePEc:zur:iewwpx:319

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    Keywords: Fechner model; random utility; tremble; expected utility theory; risk;

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