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Testing Different Stochastic Specificationsof Risky Choice

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  • Graham Loomes
  • Robert Sugden

Abstract

The Harless–Camerer (HC), Hey–Orme (HO) and random preference (RP) models of stochastic variation in choice under uncertainty are compared. Implications of these models, including some that are independent of the deterministic theory with which they are combined, are tested in an experiment in which participants respond to decision problems twice. The HC model generally performs poorly; the HO model predicts more violations of dominance than are observed; while the RP model fails to account for those few violations which do occur. Additional regularities are observed which are inconsistent with all three models when combined with expected utility theory.

Suggested Citation

  • Graham Loomes & Robert Sugden, 1998. "Testing Different Stochastic Specificationsof Risky Choice," Economica, London School of Economics and Political Science, vol. 65(260), pages 581-598, November.
    • Handle: RePEc:bla:econom:v:65:y:1998:i:260:p:581-598
    DOI: 10.1111/1468-0335.00147
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    Cited by:

    1. Jinkwon Lee, 2008. "The effect of the background risk in a simple chance improving decision model," Journal of Risk and Uncertainty, Springer, vol. 36(1), pages 19-41, February.
    2. Glenn W. Harrison & John A. List, 2004. "Field Experiments," Journal of Economic Literature, American Economic Association, vol. 42(4), pages 1009-1055, December.
    3. Nathaniel T. Wilcox, 2024. "Conditional independence in a binary choice experiment," Journal of Risk and Uncertainty, Springer, vol. 68(3), pages 205-225, June.
    4. Harrison, Glenn W., 2008. "Neuroeconomics: A Critical Reconsideration," Economics and Philosophy, Cambridge University Press, vol. 24(3), pages 303-344, November.
    5. Balcombe, Kelvin & Fraser, Iain, 2024. "A Note on an Alternative Approach to Experimental Design of Lottery Prospects," MPRA Paper 119743, University Library of Munich, Germany.
    6. Carlos Alós-Ferrer & Georg D. Granic, 2023. "Does choice change preferences? An incentivized test of the mere choice effect," Experimental Economics, Springer;Economic Science Association, vol. 26(3), pages 499-521, July.
    7. Blavatskyy, Pavlo R., 2013. "The reverse Allais paradox," Economics Letters, Elsevier, vol. 119(1), pages 60-64.
    8. Guo, Liang, 2021. "Contextual deliberation and the choice-valuation preference reversal," Journal of Economic Theory, Elsevier, vol. 195(C).
    9. Pavlo R. Blavatskyy, 2010. "Reverse Common Ratio Effect," IEW - Working Papers 478, Institute for Empirical Research in Economics - University of Zurich.
    10. Ingwersen, Nicholas & Frankenberg, Elizabeth & Thomas, Duncan, 2023. "Evolution of risk aversion over five years after a major natural disaster," Journal of Development Economics, Elsevier, vol. 163(C).
    11. Blavatskyy, Pavlo, 2015. "Behavior in the centipede game: A decision-theoretical perspective," Economics Letters, Elsevier, vol. 133(C), pages 117-122.
    12. Cunningham, Thomas, 2013. "Biases and Implicit Knowledge," MPRA Paper 50292, University Library of Munich, Germany.
    13. Jan Hausfeld & Sven Resnjanskij, 2017. "Risky Decisions and the Opportunity Costs of Time," TWI Research Paper Series 108, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    14. Nicholas Ingwersen & Elizabeth Frankenberg & Duncan Thomas, 2023. "Evolution of Risk Aversion over Five Years after a Major Natural Disaster," NBER Working Papers 31102, National Bureau of Economic Research, Inc.
    15. Glenn W. Harrison & Jia Min Ng, 2018. "Welfare effects of insurance contract non-performance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(1), pages 39-76, May.
    16. David J. Butler & Graham C. Loomes, 2007. "Imprecision as an Account of the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 97(1), pages 277-297, March.
    17. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten Igel & Rutström, Elisabet E., 2010. "Behavioral econometrics for psychologists," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 553-576, August.
    18. Henry Stott, 2006. "Cumulative prospect theory's functional menagerie," Journal of Risk and Uncertainty, Springer, vol. 32(2), pages 101-130, March.
    19. Pavlo Blavatskyy & Valentyn Panchenko & Andreas Ortmann, 2023. "How common is the common-ratio effect?," Experimental Economics, Springer;Economic Science Association, vol. 26(2), pages 253-272, April.
    20. Pavlo Blavatskyy, 2007. "Stochastic expected utility theory," Journal of Risk and Uncertainty, Springer, vol. 34(3), pages 259-286, June.
    21. Pavlo Blavatskyy, 2021. "Probabilistic independence axiom," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 46(1), pages 21-34, March.
    22. Pavlo Blavatskyy, 2018. "A second-generation disappointment aversion theory of decision making under risk," Theory and Decision, Springer, vol. 84(1), pages 29-60, January.

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