Probabilistic Choice and Stochastic Dominance
AbstractThis paper presents an axiomatic model of probabilistic choice under risk. In this model, when it comes to choosing one lottery over another, each alternative has a chance of being selected, unless one lottery stochastically dominates the other. An individual behaves as if he compares lotteries to a reference lottery—a least upper bound or a greatest lower bound in terms of weak dominance. The proposed model is compatible with several well-known violations of expected utility theory such as the common ratio effect and the violations of the betweenness. Necessary and sufficient conditions for the proposed model are completeness, weak stochastic transitivity, continuity, common consequence independence, outcome monotonicity, and odds ratio independence.
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Bibliographic InfoPaper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 364.
Date of creation: Apr 2008
Date of revision:
Probabilistic choice; first-order stochastic dominance; expected utility theory; random utility model; risk;
Find related papers by JEL classification:
- 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-2008-04-15 (All new papers)
- NEP-CBE-2008-04-15 (Cognitive & Behavioural Economics)
- NEP-DCM-2008-04-15 (Discrete Choice Models)
- NEP-ORE-2008-04-15 (Operations Research)
- NEP-UPT-2008-04-15 (Utility Models & Prospect Theory)
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