A Context Dependent Model Of Decision Making Under Risk
This paper presents a Context Dependent Valuation (CDV) model of decision making under risk where the valuation of a gamble depends not only on its own probability-outcome structure but also on the other gambles that it is compared with. This descriptive model draws motivation from the range - frequency theory (Parducci 1965. 1968) which states that the subjective value given to a stimulus depends on its position as well as its rank in the set of observed stimuli. The CDV model is based on the value maximization paradigm and is shown to explain and predict violation of non-transparent stochastic dominance (while retaining transparent stochastic dominance), procedure invariance in the form of a wide variety of preference reversals and elicitation biases, description invariance in the form of juxtaposition.