Stochastic Choice Under Risk

Pavlo R. Blavatskyy

No 272, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: 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.

Keywords: expected utility theory; stochastic utility; Fechner model; random error; risk (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe and nep-ias
Date: 2006-02
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