Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/76136 
Authors: 
Year of Publication: 
2008
Series/Report no.: 
Working Paper No. 0803
Publisher: 
University of Zurich, Socioeconomic Institute, Zurich
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.
Subjects: 
stochastic expected etility theory
prospect theory
finite mixture models
JEL: 
D81
C49
Document Type: 
Working Paper

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