{"title":"Stochastic Monotonicity and Random Utility Models: The Good and The Ugly","authors":"Henk Keffert, Nikolaus Schweizer","doi":"arxiv-2409.00704","DOIUrl":null,"url":null,"abstract":"When it comes to structural estimation of risk preferences from data on\nchoices, random utility models have long been one of the standard research\ntools in economics. A recent literature has challenged these models, pointing\nout some concerning monotonicity and, thus, identification problems. In this\npaper, we take a second look and point out that some of the criticism - while\nextremely valid - may have gone too far, demanding monotonicity of choice\nprobabilities in decisions where it is not so clear whether it should be\nimposed. We introduce a new class of random utility models based on carefully\nconstructed generalized risk premia which always satisfy our relaxed\nmonotonicity criteria. Moreover, we show that some of the models used in\napplied research like the certainty-equivalent-based random utility model for\nCARA utility actually lie in this class of monotonic stochastic choice models.\nWe conclude that not all random utility models are bad.","PeriodicalId":501273,"journal":{"name":"arXiv - ECON - General Economics","volume":"15 1","pages":""},"PeriodicalIF":0.0000,"publicationDate":"2024-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"arXiv - ECON - General Economics","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/arxiv-2409.00704","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 0
Abstract
When it comes to structural estimation of risk preferences from data on
choices, random utility models have long been one of the standard research
tools in economics. A recent literature has challenged these models, pointing
out some concerning monotonicity and, thus, identification problems. In this
paper, we take a second look and point out that some of the criticism - while
extremely valid - may have gone too far, demanding monotonicity of choice
probabilities in decisions where it is not so clear whether it should be
imposed. We introduce a new class of random utility models based on carefully
constructed generalized risk premia which always satisfy our relaxed
monotonicity criteria. Moreover, we show that some of the models used in
applied research like the certainty-equivalent-based random utility model for
CARA utility actually lie in this class of monotonic stochastic choice models.
We conclude that not all random utility models are bad.