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Stronger Utility

Author

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  • Pavlo R. Blavatskyy

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Abstract

Empirical research often requires a method how to convert a deterministic economic theory into an econometric model. A popular method is to add a random error term on the utility scale. This method, however, violates stochastic dominance. A modification of this method is proposed to avoid violations of dominance. The modified model compares favorably to other existing models in terms of goodness of fit to experimental data. The modified model can rationalize the preference reversal phenomenon. An intuitive axiomatic characterization of the modified model is provided. Important microeconomic concept of risk aversion is well-defined in the modified model.

Suggested Citation

  • Pavlo R. Blavatskyy, 2011. "Stronger Utility," Working Papers 2011-16, Faculty of Economics and Statistics, University of Innsbruck.
  • Handle: RePEc:inn:wpaper:2011-16
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    File URL: https://www2.uibk.ac.at/downloads/c4041030/wpaper/2011-16.pdf
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    References listed on IDEAS

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    Cited by:

    1. Blavatskyy, Pavlo R., 2012. "Utility of a quarter-million," Economics Letters, Elsevier, vol. 117(3), pages 650-653.

    More about this item

    Keywords

    Decision Theory; Probabilistic Choice; Stochastic Dominance; Strong Utility; Risk Aversion;

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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