Stochastic Choice and Consistency in Decision Making Under Uncertainty: An Experimental Study

This paper reports the results of an experiment designed to uncover the stochastic structure of individual preferences over lotteries. Unlike previous experiments, which have presented subject with pairwise choices between lotteries, our design allowed subjects to choose (virtually) any convex combination of a pair of lotteries as well. We interpret the mixtures of lotteries chosen as a measure of the stochastic structure of choice. We test between the random utility and the deterministic preferences interpretations of stochastic choice. The main findings of the experiment are that the typical subject prefers mixtures of lotteries rather than the extremes of a linear lottery choice set. The distribution of choices does not change in a second asking of the same choice question. We argue that this provides support for the deterministic preferences interpretation of stochastic choice over the random utility interpretation. As a subsidiary result, we find that a small proportion of subjects make choices which violate transitivity, but the level of intransitive choice falls significantly over time.