Dual choice axiom and probabilistic choice
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Dual choice axiom and probabilistic choice Pavlo R. Blavatskyy 1 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract A decision maker chooses in a probabilistic manner if she does not necessarily prefer the same choice alternative when repeatedly presented with the same choice set. Probabilistic choice may occur for a variety of reasons such as unobserved attributes of choice alternatives, imprecision of preferences, or random errors/ noise in decisions. The Luce choice model (also known as strict utility or multinomial logit) is derived from the choice axiom (also known as the independence from irrelevant alternatives). This axiom postulates that the relative likelihood of choosing one choice alternative A over another choice alternative B is not affected by the presence or absence of other choice alternatives in the choice set. This paper presents a dual choice axiom: the relative probability of NOT choosing A over the probability of NOT choosing B is independent from irrelevant alternatives. A new model of probabilistic choice is derived from this dual axiom. This model coincides with Luce’s choice model only in the case of a binary choice. The new model has similar properties as the Luce choice model: the higher is the utility of a choice alternative, the higher is the probability that a decision maker chooses this alternative and the lower is the probability that he or she chooses any other alternative. The new model differs from the Luce choice model in two aspects: utility of choice alternatives is bounded (from above and below) and choice probabilities are more sensitive to differences in utility of choice alternatives. Keywords Decision making . Probabilistic choice . Choice axiom . Independence from
irrelevant alternatives . Luce choice model . Strict utility JEL Classifications D01 . C25 . D91
* Pavlo R. Blavatskyy p.blavatskyy@montpellier–bs.com
1
Montpellier Business School, 2300, Avenue des Moulins, 34185 Montpellier Cedex 4, France
Journal of Risk and Uncertainty
1 Introduction Economic theory is traditionally based on deterministic preferences1 leaving little room for probabilistic choice.2 Empirical research, however, strongly backs probabilistic choice.3 Probabilistic choice may occur for a variety of reasons such as unobserved attributes of choice alternatives (e.g. McFadden 1976), imprecision of preferences (Falmagne 1985; Butler and Loomes 2007, 2011), random errors/noise in decisions (e.g. Fechner 1860; Hey and Orme 1994). Models of probabilistic choice originated in mathematical psychology and include inter alia random utility (also known as random preference or random parameter) approach (e.g., Falmagne 1985; Loomes and Sugden 1995), the Fechner (1860) model of random errors (or strong utility)4 and the Luce (1959) choice model (strict utility or multinomial logit).5 These models are often used in econometric estimation on microeconomic data. Yet, psychological models of probabilistic choice may not always suit economic data, which creates a demand for new m
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