Probabilistic Choice and Stochastic Dominance

Pavlo R. Blavatskyy

No 364, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: This paper presents an axiomatic model of probabilistic choice under risk. In this model, when it comes to choosing one lottery over another, each alternative has a chance of being selected, unless one lottery stochastically dominates the other. An individual behaves as if he compares lotteries to a reference lottery�a least upper bound or a greatest lower bound in terms of weak dominance. The proposed model is compatible with several well-known violations of expected utility theory such as the common ratio effect and the violations of the betweenness. Necessary and sufficient conditions for the proposed model are completeness, weak stochastic transitivity, continuity, common consequence independence, outcome monotonicity, and odds ratio independence.

Keywords: Probabilistic choice; first-order stochastic dominance; expected utility theory; random utility model; risk (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-cbe, nep-dcm, nep-ore and nep-upt
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:364

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