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Stronger utility

Author

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  • Pavlo Blavatskyy

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, ignores stochastic dominance. A modification of this method is proposed to account for stochastic 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. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Pavlo Blavatskyy, 2014. "Stronger utility," Theory and Decision, Springer, vol. 76(2), pages 265-286, February.
    • Handle: RePEc:kap:theord:v:76:y:2014:i:2:p:265-286
    DOI: 10.1007/s11238-013-9366-3
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Nathaniel T. Wilcox, 2015. "Error and Generalization in Discrete Choice Under Risk," Working Papers 15-11, Chapman University, Economic Science Institute.
    2. Nathaniel T. Wilcox, 2023. "Unusual Estimates of Probability Weighting Functions," Research in Experimental Economics, in: Models of Risk Preferences: Descriptive and Normative Challenges, volume 22, pages 69-106, Emerald Group Publishing Limited.
    3. Blavatskyy, Pavlo, 2015. "Behavior in the centipede game: A decision-theoretical perspective," Economics Letters, Elsevier, vol. 133(C), pages 117-122.
    4. Blavatskyy, Pavlo R., 2017. "Probabilistic intertemporal choice," Journal of Mathematical Economics, Elsevier, vol. 73(C), pages 142-148.

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    More about this item

    Keywords

    Decision theory; Probabilistic choice; Stochastic dominance; Strong utility; Risk aversion; Preference reversal phenomenon; C25; D03; D81;
    All these keywords.

    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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