Investigation of the Stochastic Choice under Risk using Experimental Data

Abstract

We extend the analysis of the data from the experiment of Pradiptyo et al.’s (2015) to help explaining the subjects’ behaviour on decision under risk. We investigate the relative empirical performance of the two general models of the stochastic choice: the random utility model (RUM) and the random preference model (RPM). We specify these models using two preference functionals, expected utility (EU) and rank-dependent expected utility (RDEU). We then estimate parameters 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 that of the EU in modelling the stochastic choice.

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

JEL Classification: C91, D81