Revisiting consistency with random utility maximisation: theory and implications for practical work

• Published in: Theory and decision Vol. 84; no. 2; pp. 181 - 204
• Main Authors: Hess, Stephane, Daly, Andrew, Batley, Richard
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.03.2018; Springer Nature B.V
• Subjects: Behavioral economics; Behavioral/Experimental Economics; Discrete choice; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Finance; Game Theory; Insurance; Management; Maximization; Operations Research/Decision Theory; Psychology; Quantitative psychology; Social and Behav. Sciences; Statistics for Business; Behavioural patterns; Random utility maximisation; Discrete choice; RUM properties
• ISSN: 0040-5833; 1573-7187
• DOI: 10.1007/s11238-017-9651-7

While the paradigm of utility maximisation has formed the basis of the majority of applications in discrete choice modelling for over 40 years, its core assumptions have been questioned by work in both behavioural economics and mathematical psychology as well as more recently by developments in the RUM-oriented choice modelling community. This paper reviews the basic properties with a view to explaining the historical pre-eminence of utility maximisation and addresses the question of what departures from the paradigm may be necessary or wise in order to accommodate richer behavioural patterns. We find that many, though not all, of the behavioural traits discussed in the literature can be approximated sufficiently closely by a random utility framework, allowing analysts to retain the many advantages that such an approach possesses.