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Mixture models of choice under risk

In: Experiments in Economics Decision Making and Markets

Author

Listed:
  • Anna Conte
  • John D. Hey
  • Peter G. Moffatt

Abstract

This paper is concerned with estimating preference functionals for choice under risk from the choice behaviour of individuals. We note that there is heterogeneity in behaviour between individuals and within individuals. By ‘heterogeneity between individuals’ we mean that people are different, in terms of both their preference functionals and their parameters for these functionals. By ‘heterogeneity within individuals’ we mean that the behaviour may be different even by the same individual for the same choice problem. We propose methods of taking into account all forms of heterogeneity, concentrating particularly on using a Mixture Model to capture the heterogeneity of preference functionals.

Suggested Citation

  • Anna Conte & John D. Hey & Peter G. Moffatt, 2018. "Mixture models of choice under risk," World Scientific Book Chapters,in: Experiments in Economics Decision Making and Markets, chapter 1, pages 3-12 World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789813235816_0001
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    References listed on IDEAS

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    1. Loomes, Graham & Moffatt, Peter G & Sugden, Robert, 2002. "A Microeconometric Test of Alternative Stochastic Theories of Risky Choice," Journal of Risk and Uncertainty, Springer, vol. 24(2), pages 103-130, March.
    2. Loomes, Graham & Sugden, Robert, 1998. "Testing Different Stochastic Specifications of Risky Choice," Economica, London School of Economics and Political Science, vol. 65(260), pages 581-598, November.
    3. David Buschena & David Zilberman, 2008. "Generalized expected utility, heteroscedastic error, and path dependence in risky choice," Journal of Risk and Uncertainty, Springer, vol. 36(2), pages 201-201, April.
    4. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    5. John D. Hey & Chris Orme, 2018. "Investigating Generalizations Of Expected Utility Theory Using Experimental Data," World Scientific Book Chapters,in: Experiments in Economics Decision Making and Markets, chapter 3, pages 63-98 World Scientific Publishing Co. Pte. Ltd..
    6. Peter Moffatt, 2005. "Stochastic Choice and the Allocation of Cognitive Effort," Experimental Economics, Springer;Economic Science Association, vol. 8(4), pages 369-388, December.
    7. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-333, March.
    8. Peter P. Wakker, 2008. "Explaining the characteristics of the power (CRRA) utility family," Health Economics, John Wiley & Sons, Ltd., vol. 17(12), pages 1329-1344.
    9. Peter Moffatt & Simon Peters, 2001. "Testing for the Presence of a Tremble in Economic Experiments," Experimental Economics, Springer;Economic Science Association, vol. 4(3), pages 221-228, December.
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    11. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    12. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-1289, November.
    13. John D. Hey, 2018. "Experimental investigations of errors in decision making under risk," World Scientific Book Chapters,in: Experiments in Economics Decision Making and Markets, chapter 17, pages 381-388 World Scientific Publishing Co. Pte. Ltd..
    14. repec:wsi:wschap:9789813235816_0002 is not listed on IDEAS
    15. Pavlo Blavatskyy, 2007. "Stochastic expected utility theory," Journal of Risk and Uncertainty, Springer, vol. 34(3), pages 259-286, June.
    16. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
    17. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387, December.
    18. Glenn Harrison & E. Rutström, 2009. "Expected utility theory and prospect theory: one wedding and a decent funeral," Experimental Economics, Springer;Economic Science Association, vol. 12(2), pages 133-158, June.
    19. John D. Hey, 2018. "Does Repetition Improve Consistency?," World Scientific Book Chapters,in: Experiments in Economics Decision Making and Markets, chapter 2, pages 13-62 World Scientific Publishing Co. Pte. Ltd..
    20. Botti Fabrizio & Conte Anna & Di Cagno Daniela Teresa & D'Ippoliti Carlo, 2008. "Risk Attitude in Real Decision Problems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-32, March.
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    More about this item

    Keywords

    Experimental Economics; Risk; Ambiguity; Markets; Auctions; Bargaining; Econometrics; Methodology;

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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