Investigation of the Stochastic Choice under Risk using Experimental Data
This paper extends the analysis of the data from the experiment undertaken by Pradiptyo et al. (2015), to help explain the subjects’ behaviour when making decisions under risk. This study specifically investigates the relative empirical performance of the two general models of the stochastic choice: the random utility model (RUM) and the random preference model (RPM) where this paper specifies these models using two preference functionals, expected utility (EU) and rank-dependent expected utility (RDEU). The parameters are estimated in each model using a maximum likelihood technique and run a horse-race using the goodness-of-fit between the models. The results show that the RUM better explains the subjects’ behaviour in the experiment. Additionally, the RDEU fits better than the EU for modelling the stochastic choice.
Andersen, S., Harrison, G. W., Lau, M. I., & Rutstrom, E. E. (2008) “Eliciting risk and time preferences.” Econometrica76(3): 583-618.
Blavatskyy, P. R. (2007) “Stochastic expected utility theory.”Journal of Risk and Uncertainty 34(3): 259-286.
Carbone, E. (1997) “Investigation of stochastic preference theory using experimental data.” Economics Letters57(3): 305-311.
Charness, G., Gneezy, U., & Kuhn, M. A. (2013) “Experimental methods: Extra-laboratory experiments-extending the reach of experimental economics.” Journal of Economic Behavior & Organization91: 93-100.
Cicchetti, C. J. & Dubin, J. A. (1994) “A microeconometric analysis of risk aversion and the decision to self-insure.” Journal of Political Economy 102(1): 169-186.
Conte, A., Hey, J. D. & Moffatt, P. G. (2011) “Mixture models of choice under risk.” Journal of Econometrics162(1): 79-88.
Diecidue, E. & Wakker, P. P. (2001) “On the intuition of rank-dependent utility.” Journal of Risk and Uncertainty 23(3): 281-298.
Drichoutis, A. C. & Lusk, J. L. (2014) “Judging statistical models of individual decision making under risk using in- and out-of-sample criteria.” PLos ONE 9(7): e102269.
Gilboa, I. & Schmeidler, D. (1989) “Maxmin expected utility with non-unique prior.” Journal of Mathematical Economics 18: 141-153.
Haggag, M. M. M. (2014) “New criteria of model selection and model averaging in linear regression models.” American Journal of Theoretical and Applied Statistics 3(5): 148-166.
Harless, D. W. & Camerer, C. F. (1994) “The predictive utility of generalized expected utility theories.” Econometrica62(6): 1251-1289.
Harrison, G. W., List, J. A., & Towe, C. (2007) “Naturally occurring preferences and exogenous laboratory experiments: A case study of risk aversion.” Econometrica75(2): 433-458.
Hey, J. D. (1995) “Experimental investigations of errors in decision making under risk.” European Economic Review 39: 633-640.
Hey, J. D. & Orme, C. (1994) “Investigating generalizations of expected utility theory using experimental data.” Econometrica62(6): 1291-1326.
Holt, C. A. & Laury, S. K. (2002) “Risk aversion and incentive effects.” American Economic Review 92(5): 1644-1655.
Kahneman, D. & Tversky, A. (1979) “Prospect theory: An analysis of decision under risk.” Econometrica 47(2): 262-292.
Loomes, G., Moffatt, P. G., & Sugden, R. (2002) “A microeconometric test of alternative stochastic theories of risky choice.” Journal of Risk and Uncertainty24(2): 103-130.
Loomes, G. &Sugden, R. (1982) “Regret theory: An alternative theory of rational choice under uncertainty.” Economic Journal 92(368): 805-824.
___________(1995) “Incorporating a stochastic element into decision theories.” European Economic Review 39(3): 641-648.
___________(1998) “Testing different stochastic specifications of risky choice.” Economica65(260): 581-598.
Machina, M. J. (1982) “Expected utility analysis without the independence axiom.” Econometrica50(2): 277-324.
Manski, C. F. (1977) “The structure of random utility models.” Theory and Decision 8: 229-254.
Mas-Colell, A., Green, J. R., Whinston, M. (1995) “Microeconomic Theory”. New York: Oxford University Press.
McFadden, D. L. (1981) “Econometric models of probabilistic choice.” In Structural Analysis of Discrete Data with Econometric Applications, edited by Charles F. Manski and Daniel McFadden, Cambridge, Massachusetts: MIT Press, 1981.
Moffatt, P. G. (2015) “Experimetrics: Econometrics for Experimental Economics.” Basingstoke: Palgrave, Macmillan.
Pradiptyo, R., Susamto, A. A., Wirotomo, A., Permana, Y. H., & Adisasmita, A. (2015) “Inflation formation toward Indonesia’s new fuel price regime.” mimeo Universitas Gadjah Mada.
Quiggin, J. (1982) “A theory of anticipated utility.” Journal of Economic Behavior and Organization 3: 323-343.
Starmer, C. (2000) “Developments in non-expected utility theory: The hunt for a descriptive theory of choice under risk.”Journal of Economic Literature 38: 332-382.
Toubia, O., Johnson, E., Evgeniou, T., & Delquie, P. (2013) “Dynamic experiments for estimating preferences: An adaptive method of eliciting time and risk parameters.” Management Science 59(3): 613-640.
Von Gaudecker, H. M., van Soest, A., & Wengestrom, E. (2011) “Heterogeneity in risky choice behavior in a broad population.” American Economic Review 101(2): 664-694.
Von Neumann, J., & Morgenstern, O. (1944). “Theory of Games and Economic Behavior.” Princeton, NJ, US: Princeton University Press.
- There are currently no refbacks.
Copyright (c) 2020 Gadjah Mada International Journal of Business
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.