Stochastic Expected Utility and Prospect Theory in a Horse Race: A Finite Mixture Approach

Details

Serval ID
serval:BIB_6403A1A2E8C6
Type
Report: a report published by a school or other institution, usually numbered within a series.
Publication sub-type
Working paper: Working papers contain results presented by the author. Working papers aim to stimulate discussions between scientists with interested parties, they can also be the basis to publish articles in specialized journals
Collection
Publications
Title
Stochastic Expected Utility and Prospect Theory in a Horse Race: A Finite Mixture Approach
Author(s)
Bruhin A.
Institution details
University of Zurich
Issued date
03/2008
Language
english
Abstract
This study compares the performance of Prospect Theory versus Stochastic Expected Utility Theory at fitting data on decision making under risk. Both theories incorporate well-known deviations from Expected Utility Maximization such as the Allais paradox or the fourfold pattern of risk attitudes. Stochastic Expected Utility Theory parsimoniously extends the standard microeconomic model, whereas Prospect Theory, the benchmark for aggregate choice so far, is based on psychological findings. First, the two theories' fit to representative choice is assessed for two experimental data sets, one Swiss and one Chinese. In a second step, finite mixture regressions reveal a consistent mix of two different behavioral types suggesting that researchers may take individual heterogeneity into account in order to avoid aggregation bias.
Keywords
Stochastic Expected Utility Theory, Prospect Theory, Finite Mixture Models
Create date
11/09/2012 10:35
Last modification date
20/08/2019 15:20
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