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on Discrete Choice Models |
| By: | Pavlo R. Blavatskyy |
| Abstract: | This paper analyzes individual decision making under risk. It is assumed that an individual does not have a preference relation on the set of risky lotteries. Instead, an individual possesses a probability measure that captures the likelihood of one lottery being chosen over the other. Choice probabilities have a stochastic utility representation if they can be written as a non-decreasing function of the difference in expected utilities of the lotteries. Choice probabilities admit a stochastic utility representation if and only if they are complete, strongly transitive, continuous, independent of common consequences and interchangeable. Axioms of stochastic utility are consistent with systematic violations of betweenness and a common ratio effect but not with a common consequence effect. Special cases of stochastic utility include the Fechner model of random errors, Luce choice model and a tremble model of Harless and Camerer (1994). |
| Keywords: | Expected utility theory, stochastic utility, Fechner model, Luce choice model, tremble |
| JEL: | C91 D81 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:311&r=dcm |
| By: | Pavlo Blavatskyy; Ganna Pogrebna |
| Abstract: | Economic research offers two traditional ways of analyzing decision making under risk. One option is to compare the goodness of fit of different decision theories using the same model of stochastic choice. An alternative way is to vary models of stochastic choice combining them with only one or two decision theories. This paper proposes to look at the bigger picture by comparing different combinations of decision theories and models of stochastic choice. We select a menu of seven popular decision theories and embed each theory in five models of stochastic choice including tremble, Fechner and random utility model. We find that the estimated parameters of decision theories differ significantly when theories are combined with different models. Depending on the selected model of stochastic choice we obtain different ranking of decision theories with regard to their goodness of fit to the data. The fit of all analyzed decision theories improves significantly when they are embedded in a Fechner model of heteroscedastic truncated errors (or random utility model in a dynamic decision problem). |
| Keywords: | Fechner model, random utility, tremble, expected utility theory, risk |
| JEL: | C93 D81 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:319&r=dcm |
| By: | Michael H. Birnbaun; Ulrich Schmidt |
| Abstract: | Several models of choice under uncertainty imply systematic violations of transitivity of preference. Our experiments explored whether people show patterns of intransitivity predicted by these models. To distinguish “true” violations from those produced by “error,” a model was fit in which each choice can have a different error rate and each person can have a different pattern of true preferences that does not need to be transitive. Error rate for a choice is estimated from preference reversals between repeated presentations of the same choice. Our results showed that very few people repeated intransitive patterns. We can retain the hypothesis that transitivity best describes the data of the vast majority of participants. |
| Keywords: | decision making, errors, regret theory, transitivity |
| JEL: | C91 D81 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1396&r=dcm |
| By: | Wolfgang R. Köhler |
| Abstract: | A large experimental and empirical literature on asymmetric dominance and attraction effects shows that the probability that an alternative is chosen can increase if additional alternatives become available. Hence context matters and choices and, therefore, market shares can not be accurately described by standard choice models where individuals choose the alternative that yields the highest utility. This paper analyzes a simple procedural choice model. Individuals determine their choice by a sequence of binary comparisons. The model offers an intuitive explanation for violations of regularity such as the attraction and the asymmetric dominance effect and shows their relation to the similarity effect. The model analyzes a new rationale why context matters. The model is applied to explain primacy and recency effects and to derive implications with respect to product design. |
| Keywords: | Asymmetric dominance, attraction effect, similarity effect, binary choice, primacy effect, recency effect, regularity |
| JEL: | D11 M31 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:330&r=dcm |