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Stochastic Choice Under Risk


Blavatskyy, Pavlo R (2006). Stochastic Choice Under Risk. Working paper series / Institute for Empirical Research in Economics No. 272, 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 transparentnmistakes 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 generalizedncommon consequence effect (the Allais paradox), the common ratio effect and the violations of the betweenness.

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 transparentnmistakes 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 generalizedncommon consequence effect (the Allais paradox), the common ratio effect and the violations of the betweenness.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:February 2006
Deposited On:29 Nov 2011 22:47
Last Modified:05 Apr 2016 15:11
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html
Permanent URL: https://doi.org/10.5167/uzh-52229

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