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Stochastic Choice Under Risk


  • Pavlo R. Blavatskyy


An individual makes random errors when evaluating the expected utility of a risky lottery. Errors are symmetrically distributed around zero as long as an individual does not make transparent mistakes such as choosing a risky lottery over its highest possible outcome for certain. This stochastic decision theory explains many well-known violations of expected utility theory such as the fourfold pattern of risk attitudes, the discrepancy between certainty equivalent and probability equivalent elicitation methods, the preference reversal phenomenon, the generalized common consequence effect (the Allais paradox), the common ratio effect and the violations of the betweenness.

Suggested Citation

  • Pavlo R. Blavatskyy, 2006. "Stochastic Choice Under Risk," IEW - Working Papers 272, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:272

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    Cited by:

    1. Pavlo Blavatskyy, 2007. "Stochastic expected utility theory," Journal of Risk and Uncertainty, Springer, vol. 34(3), pages 259-286, June.

    More about this item


    expected utility theory; stochastic utility; Fechner model; random error; risk;

    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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