Models of Stochastic Choice and Decision Theories: Why Both are Important for Analyzing Decisions

Journal of Applied Econometrics, Forthcoming

41 Pages Posted: 19 Apr 2007 Last revised: 3 Feb 2009

See all articles by Pavlo R. Blavatskyy

Pavlo R. Blavatskyy

Montpellier Business School

Ganna Pogrebna

University of Bonn - Institute of Business Administration I

Date Written: December 19, 2008

Abstract

We select a menu of seven popular decision theories and embed each theory in five models of stochastic choice including tremble, Fechner and random utility model. We find that the estimated parameters of decision theories differ significantly when theories are combined with different models. Depending on the selected model of stochastic choice we obtain different rankings of decision theories with regard to their goodness of fit to the data. The fit of all analyzed decision theories improves significantly when they are embedded in a Fechner model of heteroscedastic truncated errors or a random utility model.

Keywords: Fechner model, random utility, tremble, expected utility theory, risk

JEL Classification: C93, D81

Suggested Citation

Blavatskyy, Pavlo R. and Pogrebna, Ganna, Models of Stochastic Choice and Decision Theories: Why Both are Important for Analyzing Decisions (December 19, 2008). Journal of Applied Econometrics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=980670

Pavlo R. Blavatskyy (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Ganna Pogrebna

University of Bonn - Institute of Business Administration I ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany

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