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A Comparison of Five Models that Predict Violations of First-Order Stochastic Dominance in Risky Decision Making

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  • Michael Birnbaum

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Abstract

Five descriptive models of risky decision making are tested in this article, including four quantitative models and one heuristic account. Seven studies with 1802 participants were conducted to compare accuracy of predictions to new tests of first order stochastic dominance. Although the heuristic model was a contender in previous studies, it can be rejected by the present data, which show that incidence of violations varies systematically with the probability distribution in the gambles. The majority continues to violate stochastic dominance even when two of three branches have higher consequences in the dominant gamble, and they persist in mixed gambles even when probability to win is higher and probability to lose is lower in the dominant gamble. The transfer of attention exchange model (TAX) was the most accurate model for predicting the results. Copyright Springer Science + Business Media, Inc. 2005

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  • Michael Birnbaum, 2005. "A Comparison of Five Models that Predict Violations of First-Order Stochastic Dominance in Risky Decision Making," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 263-287, December.
  • Handle: RePEc:kap:jrisku:v:31:y:2005:i:3:p:263-287
    DOI: 10.1007/s11166-005-5103-9
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Birnbaum, Michael H. & Gutierrez, Roman J., 2007. "Testing for intransitivity of preferences predicted by a lexicographic semi-order," Organizational Behavior and Human Decision Processes, Elsevier, vol. 104(1), pages 96-112, September.
    2. Birnbaum, Michael H. & Schmidt, Ulrich, 2006. "Empirical Tests of Intransitivity Predicted by Models of Risky Choice," Economics Working Papers 2006-10, Christian-Albrechts-University of Kiel, Department of Economics.
    3. Tabea Herrmann & Olaf Hübler & Lukas Menkhoff & Ulrich Schmidt, 2017. "Allais for the poor: Relations to ability, information processing, and risk attitudes," Journal of Risk and Uncertainty, Springer, vol. 54(2), pages 129-156, April.
    4. repec:kap:theord:v:84:y:2018:i:1:d:10.1007_s11238-017-9607-y is not listed on IDEAS
    5. repec:kap:jrisku:v:54:y:2017:i:1:d:10.1007_s11166-017-9251-5 is not listed on IDEAS
    6. Birnbaum, Michael H., 2006. "Evidence against prospect theories in gambles with positive, negative, and mixed consequences," Journal of Economic Psychology, Elsevier, vol. 27(6), pages 737-761, December.
    7. Michael H. Birnbaum & Ulrich Schmidt & Miriam D. Schneider, 2017. "Testing independence conditions in the presence of errors and splitting effects," Journal of Risk and Uncertainty, Springer, vol. 54(1), pages 61-85, February.
    8. Gürtler, Marc & Stolpe, Julia, 2011. "Piecewise continuous cumulative prospect theory and behavioral financial engineering," Working Papers IF37V1, Technische Universität Braunschweig, Institute of Finance.
    9. Daniel R. Cavagnaro & Richard Gonzalez & Jay I. Myung & Mark A. Pitt, 2013. "Optimal Decision Stimuli for Risky Choice Experiments: An Adaptive Approach," Management Science, INFORMS, vol. 59(2), pages 358-375, February.
    10. Michael Birnbaum & Ulrich Schmidt, 2010. "Testing transitivity in choice under risk," Theory and Decision, Springer, vol. 69(4), pages 599-614, October.
    11. Dertwinkel-Kalt, Markus & Köster, Mats, 2015. "Violations of first-order stochastic dominance as salience effects," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 59(C), pages 42-46.
    12. Birnbaum, Michael H. & LaCroix, Adam R., 2008. "Dimension integration: Testing models without trade-offs," Organizational Behavior and Human Decision Processes, Elsevier, vol. 105(1), pages 122-133, January.
    13. Marc Rieger & Mei Wang, 2008. "Prospect theory for continuous distributions," Journal of Risk and Uncertainty, Springer, vol. 36(1), pages 83-102, February.
    14. Michael H. Birnbaum & Daniel Navarro-Martinez & Christoph Ungemach & Neil Stewart & Edika G. Quispe-Torreblanca, 2016. "Risky Decision making: Testing for violations of transitivity predicted by an editing mechanism," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 11(1), pages 75-91, January.
    15. Michael Birnbaum & Ulrich Schmidt, 2008. "An experimental investigation of violations of transitivity in choice under uncertainty," Journal of Risk and Uncertainty, Springer, vol. 37(1), pages 77-91, August.

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