Testing the ‘standard’ model of stochastic choice under risk
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Models of stochastic choice are intended to capture the substantial amount of noise observed in decisions under risk. We present an experimental test of one model, which many regard as the default—the Basic Fechner model. We consider one of the model’s key assumptions—that the noise around the subjective value of a risky option is independent of other features of the decision problem. We find that this assumption is systematically violated. However the main patterns in our data can be accommodated by a more recent variant of the Fechner model, or within the random preference framework.
KeywordsChoice under risk Stochastic choice Fechner model Random preference
JEL classificationD81 C91
Andrea Isoni and Graham Loomes acknowledge the financial support of the UK Economic and Social Research Council (grant no. RES-051-27-0248) and David Butler acknowledges the support of the Australian Research Council (grant: DP1095681) in this collaboration. We thank the Centre for Behavioural and Experimental Social Science at the University of East Anglia for the resources and facilities used to carry out the experimental work reported here. Finally, we have benefitted from helpful comments and suggestions by an anonymous referee. The usual disclaimer applies.
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