Testing the Effects of Similarity on Risky Choice: Implications for Violations of Expected Utility |
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Authors: | Buschena David E Zilberman David |
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Institution: | (1) Department of Agricultural Economics and Economics, Montana State University, Bozeman, MT, 59717-2920, USA Phone;(2) Department of Agricultural and Resource Economics, University of California, Berkeley, CA, USA. |
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Abstract: | Our aim in this paper was to establish an empirical evaluation for similarity effects modeled by Rubinstein; Azipurua et al.; Leland; and Sileo. These tests are conducted through a sensitivity analysis of two well-known examples of expected utility (EU) independence violations. We found that subjective similarity reported by respondents was explained very well by objective measures suggested in the similarity literature. The empirical results of this analysis also show that: (1) the likelihood of selection for the riskier choice increases as the pair becomes more similar, (2) these choice patterns are consistent with well-known independence violations of expected utility, and (3) a significant proportion of individuals exhibit intransitive choice patterns predicted under similarity effects, but not allowed under generalized expected utility models for risky choice. |
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Keywords: | Discrete choice probit models Expected utility Independence violations Risk |
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