S-WoPEc
 
Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 558:
Better may be worse: Some monotonicity results and paradoxes in discrete choice

Lars-Göran Mattsson (), Mark Voorneveld () and Jörgen W. Weibull ()

Abstract: It is not unusual in real-life that one has to choose among finitely many alternatives when the merit of each alternative is not perfectly known. This may be the case when an individual chooses school, doctor or pension plan, or when a firm chooses between alternative R&D projects. Instead of observing the actual utilities of the alternatives at hand, one typically observes more or less precise signals that are positively correlated with these utilities. In addition, the decision-maker may, at some cost or disutility of effort, choose to increase the precision of these signals, for example by way of a careful study or the hiring of expertise. We here develop a model of such decision problems. We begin by showing that a version of the monotone likelihood-ratio property is sufficient, and also essentially necessary, for the optimality of the heuristic decision rule to always choose the alternative with the highest signal. Secondly, we show that it is not always advantageous to face alternatives with higher utilities, a non-monotonicity result that holds even if the decision-maker optimally chooses the signal precision. We finally establish an operational first-order condition for the optimal precision level in a canonical class of decision-problems, and we show that the optimal precision level may be discontinuous in the precision cost.

Keywords: decision theory; discrete choice; uncertainty; monotonicity.; (follow links to similar papers)

JEL-Codes: C44; D01; D11; D91; (follow links to similar papers)

22 pages, March 9, 2004, Revised September 13, 2006

Download Statistics


This paper is published as:
Mattsson, Lars-Göran, Mark Voorneveld and Jörgen W. Weibull, (2007), 'Better may be worse: Some monotonicity results and paradoxes in discrete choice', Theory and Decision, Vol. 63, pages 121-151



Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:hastef:0558 This page was generated on 2014-12-14 19:23:05