Investigation of the Stochastic Choice under Risk   using Experimental Data

Yudistira Permana; Giovanni van Empel; Rimawan Pradiptyo

doi:10.22146/gamaijb.34446

Investigation of the Stochastic Choice under Risk using Experimental Data

Yudistira Permana, Giovanni van Empel, Rimawan Pradiptyo

(Submitted 29 March 2018)

(Published 30 August 2020)

Abstract

This paper extends the analysis of the data from the experiment undertaken by Pradiptyo et al. (2015), to help explain the subjects’ behaviour when making decisions under risk. This study specifically investigates the relative empirical performance of the two general models of the stochastic choice: the random utility model (RUM) and the random preference model (RPM) where this paper specifies these models using two preference functionals, expected utility (EU) and rank-dependent expected utility (RDEU). The parameters are estimated in each model using a maximum likelihood technique and run a horse-race using the goodness-of-fit between the models. The results show that the RUM better explains the subjects’ behaviour in the experiment. Additionally, the RDEU fits better than the EU for modelling the stochastic choice.

Keywords

Stochastic choice, expected utility, rank-dependent expected utility, maximum likelihood, lab experiment, risk

Full Text: PDF

DOI: 10.22146/gamaijb.34446

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