Monotone Stochastic Choice Models: The Case of Risk and Time Preferences

By Jose Apesteguia, Miguel A. Ballester. Journal of Political Economy, 2015

136 citations recorded by the source corpus.

Suppose that, when evaluating two alternatives x and y by means of a parametric utility function, low values of the parameter indicate a preference for x and high values indicate a preference for y. We say that a stochastic choice model is monotone whenever the probability of choosing x is decreasing in the preference parameter. We show that the standard use of random utility models in the context of risk and time preferences may sharply violate this monotonicity property and argue that their use in preference estimation may be problematic. They may pose identification problems and could yield biased estimations. We then establish that the alternative random parameter models are always monotone.

Subfields: Economics and Econometrics, General Decision Sciences

View Paper: https://www.semanticscholar.org/paper/bf093d9ab172966a9ca415004d4c13dcc5a4eaeb

Citations in the corpus

• Cognitive Imprecision and Small-Stakes Risk Aversion (2018, unknown): “And while it is always possible to explain rejection of any given bet by assuming sufficient rapidly diminishing marginal utility of wealth, the degree of curvature of the utility function that is required will then imply that the same person should reject even extremely favorable bets when potentia”