Testing for Independence while Allowing for Probabilistic Choice

Research output: Contribution to journalArticlepeer-review

Authors

Colleges, School and Institutes

Abstract

We propose a broad framework for individual choice under risk which can accommodate many stochastic formulations of various deterministic theories. Using this framework to guide an experimental design, we show that most individuals’ departures from the independence axiom cannot be explained by adding a ‘random noise’ term to a deterministic ‘core’ theory which incorporates this axiom. We also find behaviour that cannot be explained in terms of the standard assumptions of Cumulative Prospect Theory, often invoked to account for violations of independence. Our results suggest that ‘similarity’ effects may explain the data better.

Details

Original languageEnglish
Pages (from-to)189-211
Number of pages23
JournalJournal of Risk and Uncertainty
Volume49
Issue number3
Publication statusPublished - 23 Dec 2014

Keywords

  • Independence axiom, Stochastic choice, Expected utility theory, Prospect theory