Wilcox, Nathaniel (2007): Stochastically more risk averse: A contextual theory of stochastic discrete choice under risk.
Download (543kB) | Preview
Microeconometric treatments of discrete choice under risk are typically homoscedastic latent variable models. Specifically, choice probabilities are given by preference functional differences (given by expected utility, rank-dependent utility, etc.) embedded in cumulative distribution functions. This approach has a problem: Estimated utility function parameters meant to represent agents’ degree of risk aversion in the sense of Pratt (1964) do not imply a suggested “stochastically more risk averse” relation within such models. A new heteroscedastic model called “contextual utility” remedies this, and estimates in one data set suggest it explains (and especially predicts) as well or better than other stochastic models.
|Item Type:||MPRA Paper|
|Original Title:||Stochastically more risk averse: A contextual theory of stochastic discrete choice under risk|
|Keywords:||risk; more risk averse; discrete choice; stochastic choice; heteroscedasticity|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C25 - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
|Depositing User:||Nathaniel Wilcox|
|Date Deposited:||02. Dec 2008 06:33|
|Last Modified:||14. Feb 2013 12:31|
Aitchison, J., 1963, Inverse distributions and independent gamma-distributed products of random variables. Biometrika 50, 505-508.
Andersen, S., G. W. Harrison, M. I. Lau and E. E. Rutström, 2007, Eliciting risk and time preferences. Forthcoming in Econometrica.
Ballinger, T. P., and N. Wilcox, 1997, Decisions, error and heterogeneity. Economic Journal 107, 1090-1105.
Becker, G. M., M. H. DeGroot and J. Marschak, 1963a, Stochastic models of choice behavior. Behavioral Science 8, 41–55.
Becker, G. M., M. H. DeGroot and J. Marschak, 1963b, An experimental study of some stochastic models for wagers. Behavioral Science 8, 199-202.
Blavatskyy, P. R., 2007, Stochastic expected utility theory. Journal of Risk and Uncertainty 34, 259-286.
Block, H. D. and J. Marschak, 1960, Random orderings and stochastic theories of responses, in I. Olkin et al., (Eds.), Contributions to probability and statistics: Essays in honor of Harold Hotelling. Stanford University Press, Stanford, pp. 97-132.
Buschena, D. E. and D. Zilberman, 2000, Generalized expected utility, heteroscedastic error, and path dependence in risky choice. Journal of Risk and Uncertainty 20, 67-88.
Busemeyer, J. and J. Townsend, 1993, Decision field theory: A dynamic-cognitive approach to decision making in an uncertain environment. Psychological Review 100, 432-59.
Busemeyer, J. and Y-M. Wang, 2000, Model comparisons and model selections based on generalization criterion methodology. Journal of Mathematical Psychology 44, 171-89.
Camerer, C., 1989, An experimental test of several generalized expected utility theories. Journal of Risk and Uncertainty 2, 61-104.
Camerer, C. and T-H. Ho, 1999, Experience weighted attraction learning in normal-form games. Econometrica 67:827-74.
Carbone, E., 1997, Investigation of stochastic preference theory using experimental data. Economics Letters 57, 305-311.
Chew, S. H., 1983, A generalization of the quasilinear mean with applications to the measurement of income inequality and decision theory resolving the Allais paradox. Econometrica 51, 1065-1092.
Chew, S. H., E. Karni and Z. Safra, 1987, Risk aversion in the theory of expected utility with rank-dependent preferences. Journal of Economic Theory 42, 370-81.
Debreu, G., 1958, Stochastic choice and cardinal utility. Econometrica 26, 440-444.
Domencich, T., and D. McFadden, 1975, Urban travel demand: A behavioral analysis. Amsterdam: North-Holland.
Edwards, W., 1954, A theory of decision making. Psychological Bulletin 51, 380-417.
Gravetter, F. and G. R. Lockhead, 1973, Criterial range as a frame of reference for stimulus judgment. Psychological Review 80, 203-216.
Gul, F., and W. Pesendorfer, 2006, Random expected utility. Econometrica 74, 121-146.
Halff, H. M., 1976, Choice theories for differentially comparable alternatives. Journal of Mathematical Psychology 14, 244-246.
Harrison, G. W. and E. E. Rutström, 2005, Expected utility theory and prospect theory: One wedding and a decent funeral. Working paper 05-18, Department of Economics, College of Business Administration, University of Central Florida.
Hartman, E. B., 1954, The influence of practice and pitch-distance between tones on the absolute identification of pitch. American Journal of Psychology 67, 1-14.
Hey, J. D., 1995, Experimental investigations of errors in decision making under risk. European Economic Review 39, 633-640.
Hey, J. D., 2001, Does repetition improve consistency? Experimental Economics 4 5-54.
Hey, J. D. and E. Carbone, 1995, Stochastic choice with deterministic preferences: An experimental investigation. Economics Letters 47, 161–167.
Hey, J. D. and C. Orme, 1994, Investigating parsimonious generalizations of expected utility theory using experimental data. Econometrica 62, 1291-1329.
Hilton, R. W. 1989. Risk attitude under random utility. Journal of Mathematical Psychology 33, 206-222.
Holt, C. A. and S. K. Laury, 2002, Risk aversion and incentive effects. American Economic Review 92, 1644-1655.
Hutchinson, T. P. and C. D. Lai, 1990, Continuous bivariate distributions, emphasizing applications. Rumsby Scientific Publishers, Adelaide, Australia.
Judd, K. L., 1998, Numerical methods in economics. MIT Press, Cambridge U.S.A.
Loomes, G., 2005, Modeling the stochastic component of behaviour in experiments: Some issues for the interpretation of data. Experimental Economics 8, 301-323.
Loomes, G. and R. Sugden, 1995, Incorporating a stochastic element into decision theories. European Economic Review 39, 641-648.
Loomes, G. and R. Sugden, 1998, Testing different stochastic specifications of risky choice. Economica 65, 581-598.
Loomes, G., P. Moffatt and R. Sugden, 2002, A microeconometric test of alternative stochastic theories of risky choice. Journal of Risk and Uncertainty 24, 103-130.
Luce, R. D. and P. Suppes, 1965, Preference, utility and subjective probability, in R. D. Luce, R. R. Bush and E. Galanter, (Eds.), Handbook of mathematical psychology Vol. III. Wiley, New York, pp. 249-410.
Machina, M., 1985, Stochastic choice functions generated from deterministic preferences over lotteries. Economic Journal 95, 575-594.
McKelvey, R. and T. Palfrey, 1995, Quantal response equilibria for normal form games. Games and Economic Behavior 10, 6-38.
Moffatt, P., 2005, Stochastic choice and the allocation of cognitive effort. Experimental Economics 8, 369-388.
Moffatt, P. and S. Peters, 2001, Testing for the presence of a tremble in economics experiments. Experimental Economics 4, 221-228.
Myers, J. L. and E. Sadler, 1960, Effects of range of payoffs as a variable in risk taking. Journal of Experimental Psychology 60, 306-309.
Papke, L. E., and J. M. Wooldridge, 1996, Econometric methods for fractional response variables with an application to 401(k) plan participation rates. Journal of Applied Econometrics 11, 619-632.
Parducci, A., 1965, Category judgment: A range-frequency model. Psychological Review 72, 407-418.
Parducci, A., 1974, Contextual effects: A range-frequency analysis, in E. C. Carterette and M. P. Friedman, (Eds.), Handbook of perception Vol. 2. Academic Press, New York, 127-141.
Pollack, I., 1953, The information of elementary auditory displays, II. Journal of the Accoustical Society of America 25, 765-769.
Pratt, J. W., 1964, Risk aversion in the small and in the large. Econometrica 32, 122-136.
Prelec, D., 1998, The probability weighting function. Econometrica 66, 497-527.
Quiggin, J, 1982, A theory of anticipated utility. Journal of Economic Behavior and Organization 3, 323-343.
Rothschild, M. and J. E. Stiglitz, 1970, Increasing risk I: A definition. Journal of Economic Theory 2, 225-243.
Saha, A, 1993, Expo-Power Utility: A 'Flexible' Form for Absolute and Relative Risk Aversion. American Journal of Agricultural Economics 75, 905-913.
Starmer, C. and R. Sugden, 1989, Probability and juxtaposition effects: An experimental investigation of the common ratio effect. Journal of Risk and Uncertainty 2, 159-78.
Tversky, A. and J. E. Russo, 1969, Substitutability and similarity in binary choices. Journal of Mathematical Psychology 6, 1-12.
Tversky, A. and D. Kahneman, 1992, Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty 5, 297–323.
Vuong, Q., 1989, Likelihood ratio tests for model selection and non-nested hypotheses. Econometrica 57, 307–333.
Wilcox, N., 2007a, Stochastic models for binary discrete choice under risk: A critical stochastic modeling primer and econometric comparison. Forthcoming in J.C. Cox and G. W. Harrison, (Eds.), Research in experimental economics Vol. 12: Risk aversion in experiments. JAI Press, Greenwich, CT.
Wilcox, N., 2007b, Predicting risky choices out-of-context: A Monte Carlo study. Working Paper, University of Houston Department of Economics.
Wooldridge, J. M., 2002, Econometric analysis of cross section and panel data. MIT Press, Cambridge U.S.A.