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Empirical underidentification in estimating random utility models : the role of choice sets and standardizations

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Olschewski, Sebastian, Sirotkin, Pavel and Rieskamp, Jörg (2021) Empirical underidentification in estimating random utility models : the role of choice sets and standardizations. British Journal of Mathematical and Statistical Psychology . doi:10.1111/bmsp.12256

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Official URL: https://doi.org/10.1111/bmsp.12256

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Abstract

A standard approach to distinguishing people’s risk preferences is to estimate a random utility model using a power utility function to characterize the preferences and a logit function to capture choice consistency. We demonstrate that with often‐used choice situations, this model suffers from empirical underidentification, meaning that parameters cannot be estimated precisely. With simulations of estimation accuracy and Kullback–Leibler divergence measures we examined factors that potentially mitigate this problem. First, using a choice set that guarantees a switch in the utility order between two risky gambles in the range of plausible values leads to higher estimation accuracy than randomly created choice sets or the purpose‐built choice sets common in the literature. Second, parameter estimates are regularly correlated, which contributes to empirical underidentification. Examining standardizations of the utility scale, we show that they mitigate this correlation and additionally improve the estimation accuracy for choice consistency. Yet, they can have detrimental effects on the estimation accuracy of risk preference. Finally, we also show how repeated versus distinct choice sets and an increase in observations affect estimation accuracy. Together, these results should help researchers make informed design choices to estimate parameters in the random utility model more precisely.

Item Type: Journal Article
Subjects: B Philosophy. Psychology. Religion > BF Psychology
H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
Q Science > QA Mathematics
Q Science > QA Mathematics > QA76 Electronic computers. Computer science. Computer software
Divisions: Faculty of Social Sciences > Warwick Business School
SWORD Depositor: Library Publications Router
Library of Congress Subject Headings (LCSH): Risk, Risk-taking (Psychology) , Consumers' preferences , Decision making -- Simulation methods
Journal or Publication Title: British Journal of Mathematical and Statistical Psychology
Publisher: John Wiley & Sons Ltd.
ISSN: 0007-1102
Official Date: 8 November 2021
Dates:
DateEvent
8 November 2021Available
2 October 2021Accepted
DOI: 10.1111/bmsp.12256
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Open Access
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
P2BSP1_188188 Schweizerischer Nationalfonds zur Förderung der Wissenschaftlichen Forschunghttp://dx.doi.org/10.13039/501100001711

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