Stochastic Dominance and Preference for Randomization

Decision theorists usually take a normative view on stochastic dominance: a DM who chooses a lottery that puts more weight on options he likes less must be making a mistake. In this project I argue that stochastic dominance violations may naturally occur in situations where anticipatory utility is high, such as going on a holiday trip. In such a situation, the DM may trade the certainty of going to his favorite destination for the excitement of not knowing where he will go. To document this phenomenon, I conduct an experiment in which participants make a series of binary choices between a sure destination and a lottery over holiday trips. The outcome of the lottery is revealed close to the date of travel. I vary the characteristics of the lotteries to understand when violations of stochastic dominance are most likely to occur and analyze their properties. I discuss the implications for the modelling of anticipatory utility.

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