Stochastic dominance and demand for surprise

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• Department of Economics

Decision theorists usually take a normative view on stochastic dominance: a decision maker who chooses a dominated lottery must be making a mistake. This paper provides evidence 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 decision maker may trade the certainty of going to his favourite 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 "surprise lottery" over holiday trips, with the lottery outcome revealed close to the date of travel. I vary lottery characteristics to understand when violations are most likely to occur and analyse their properties. I discuss the implications for the design of "surprise goods" and the modelling of anticipatory utility.