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A Microeconometric Test of Alternative Stochastic Theories of Risky Choice

Author

Listed:
  • Loomes, G.
  • Moffatt, P.G.
  • Sugden, R.

Abstract

We compare the random preference, Fechner, and constant error (or "tremble") approaches to the stochastic modelling of choice under risk. Various combinations of these approaches are used with expected utility and rank-dependent theory to generate a set of econometric models. These are estimated in a random effects framework using experimental data from two samples of 46 subjects who each faced 90 pairwise choice problems. The best fitting model uses the random preferences approach with an added tremble mechanism, in conjunction with rank-dependent theory. As subject gain experience, trembles become less frequent and there is less deviation from expected utility theory.

Suggested Citation

  • Loomes, G. & Moffatt, P.G. & Sugden, R., 1998. "A Microeconometric Test of Alternative Stochastic Theories of Risky Choice," University of East Anglia Discussion Papers in Economics 9806, School of Economics, University of East Anglia, Norwich, UK..
  • Handle: RePEc:uea:papers:9806
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    Keywords

    STOCHASTIC MODELS ; RISK ; EXPERIMENTS ; ECONOMETRICS;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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