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Probabilistic Choice and Stochastic Dominance

Author

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  • Pavlo R. Blavatskyy

Abstract

This 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.

Suggested Citation

  • Pavlo R. Blavatskyy, 2008. "Probabilistic Choice and Stochastic Dominance," IEW - Working Papers 364, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:364
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    File URL: https://www.econ.uzh.ch/apps/workingpapers/wp/iewwp364.pdf
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    Cited by:

    1. Pavlo Blavatskyy, 2009. "Preference reversals and probabilistic decisions," Journal of Risk and Uncertainty, Springer, vol. 39(3), pages 237-250, December.

    More about this item

    Keywords

    Probabilistic choice; first-order stochastic dominance; expected utility theory; random utility model; risk;
    All these keywords.

    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

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