Quantitative tests of the perceived relative argument model: Comment on Loomes (2010)

Loomes (2010, Psychological Review) proposed the Perceived Relative Argument Model (PRAM) as a novel descriptive theory for risky choice. PRAM differs from models like prospect theory in that decision makers do not compare 2 prospects by first assigning each prospect an overall utility and then choosing the prospect with the higher overall utility. Instead, the decision maker determines the relative argument for one or the other prospect separately for outcomes and probabilities, before reaching an overall pairwise preference. Loomes (2010) did not model variability in choice behavior. We consider 2 types of "stochastic specification" of PRAM. In one, a decision maker has a fixed preference, and choice variability is caused by occasional errors/trembles. In the other, the parameters of the perception functions for outcomes and for probabilities are random, with no constraints on their joint distribution. State-of-the-art frequentist and Bayesian "order-constrained" inference suggest that PRAM accounts poorly for individual subject laboratory data from 67 participants. This conclusion is robust across 7 different utility functions for money and remains largely unaltered also when considering a prior unpublished version of PRAM (Loomes, 2006) that featured an additional free parameter in the perception function for probabilities.