Revealing a preference for mixtures: An experimental study of risk

Abstract

Using a revealed preference approach, we conduct an experiment where subjects make choices from linear convex budgets in the domain of risk. We find that many individuals prefer mixtures of lotteries in ways that systematically rule out expected utility behavior. We explore the extent to which an individual's preference to choose mixtures is related to a preference for randomization by comparing choices from a convex choice task to the decisions made in a repeated discrete choice task. We find that a preference to mix is positively correlated with behavior from repeated discrete choice tasks.

Consciously stochastic in preference reversals

“…Instead of repeating similar choices multiple times as in random utility models, we may be able to directly elicit subjects' subjective assessments of randomness and use them to capture stochastic choice. For example, we could allow subjects to assign randomization probabilities to various options in a choice set and pay them according to these randomization probabilities (Feldman & Rehbeck, 2022;Agranov & Ortoleva, 2023;Ong & Qiu, 2023;Halevy et al, 2023). Arts et al (2020) provided some indicative evidence for the potential of such an approach for capturing stochastic choices: Across subjects and decisions, a higher randomization probability for an option corresponded to choosing that option more frequently (but not always) in binary choices.…”

Random utility and limited consideration

“…It is noteworthy that if individuals have convex risk preferences to mix between lotteries, repetition of discretized choice tasks may make it hard to estimate risk preferences. Feldman and Rehbeck (2022) show that subjects who mix between lotteries in convex budgets sets are more likely to randomize choices in a repeated discretized task. Our experiment that uses different cost‐treatments and randomizes the order of lotteries in presentation may alleviate such concerns compared to previous experiments in which the same set of lotteries in a fixed order was repeatedly presented to subjects 43…”

Irresolute choice behavior

“…Recent experimental studies documented evidence of deliberate randomization (Agranov et al, 2022; Agranov & Ortoleva, 2017; Dwenger et al, 2018; Feldman & Rehbeck, 2022; Halevy et al, 2023). One interpretation of this evidence is that preferences are incomplete and decision makers relegate the decisions to the randomizing devices.…”