Stronger utility (Q2015036)

The topic of the article is related to converting deterministic economic theory into an econometric model. The author considers the commonly used method to add a random error term on the utility scale and proposes a modification of this method to account for stochastic dominance. The modified model is compared to other existing models in terms of goodness of fit to experimental data. The proposed model can also rationalize the preference reversal phenomenon. A simple axiomatization of the model is presented. The macroeconomic concept of risk aversion is defined in the model which admits not only estimating risk attitudes but also producing results that have standard microeconomic interpretation.