| David Buschena, Montana State University David Zilberman, University of California Berkeley |
| Generalized Expected Utility, Heteroscedastic Error, and Path Dependence in Risky Choice |
| Session: C-2-26 Saturday 12 August 2000 by Buschena, David |
| We evaluate the fit of several generalized expected utility models under homoscedasticity and three different heteroscedastic error structures for the data set first reported in Hey and Orme (1994). Standard chi-squared tests are used for nested tests, and both the Akaike (1973) information criterion and its consistent version (Hurvich and Tsai, 1989) are used for non-nested ranking of these models. Generalized expected utility models lose much of their predictive dominance over expected utility when a heteroscedastic error structure is used. Indeed, for most respondents and under various heteroscedastic error structures, a generalized expected utility framework gives no significant improvement in model fit relative to expected utility. A testing framework is developed that explicitly accounts for the path-dependent nature of the model selection problem. Not only does the selection of preference models depend on the error structure assumed, but the reverse is also true: the selection of the error structure depends on the preference structure assumed. |