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Strength of preference and decision making under risk


Alós-Ferrer, Carlos; Garagnani, Michele (2020). Strength of preference and decision making under risk. Working paper series / Department of Economics 330, University of Zurich.

Abstract

Influential economic approaches as random utility models or quantal-response equilibria assume a monotonic relation between error rates and choice difficulty or "strength of preference", in line with widespread evidence from discrimination tasks in psychology and neuroscience. However, while the latter define difficulty through objective dimensions (weight, length, etc), for economic decisions under risk the appropriate dimension remains unclear, with candidates including payoff-irrelevant numerical magnitudes. The very existence of the effects remains largely untested, because fitting models which assume such relations to data simply produces spurious findings. We provide a systematic empirical validation relying on two parsimonious experimental designs. Strength-of-preference effects are explained by expected values if objectively-correct answers exist, and by cardinal differences in independently-estimated utilities for preferential choices. Numerical magnitudes produce additional but minor effects. Finally, response times are inversely related to strength of preference, confirming that the observed relations are not "as if" explanations.

Abstract

Influential economic approaches as random utility models or quantal-response equilibria assume a monotonic relation between error rates and choice difficulty or "strength of preference", in line with widespread evidence from discrimination tasks in psychology and neuroscience. However, while the latter define difficulty through objective dimensions (weight, length, etc), for economic decisions under risk the appropriate dimension remains unclear, with candidates including payoff-irrelevant numerical magnitudes. The very existence of the effects remains largely untested, because fitting models which assume such relations to data simply produces spurious findings. We provide a systematic empirical validation relying on two parsimonious experimental designs. Strength-of-preference effects are explained by expected values if objectively-correct answers exist, and by cardinal differences in independently-estimated utilities for preferential choices. Numerical magnitudes produce additional but minor effects. Finally, response times are inversely related to strength of preference, confirming that the observed relations are not "as if" explanations.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D01, D81, D91
Uncontrolled Keywords:Stochastic choice, strength of preference, decision errors, risk attitude, choice difficulty
Language:English
Date:July 2020
Deposited On:29 Jul 2019 15:29
Last Modified:10 Jul 2020 14:42
Series Name:Working paper series / Department of Economics
Number of Pages:17
ISSN:1664-705X
Additional Information:Revised version
OA Status:Green
Official URL:https://www.econ.uzh.ch/en/research/workingpapers.html?paper-id=1009

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