An allais paradox for generalized expected utility theories?
AbstractThis article reports the results of an experiment which aims at providing a test of ordinal independence, a necessary property of Generalized Expected Utility theories such as Rank-Dependent Expected Utility theory (RDEU). Our experiment is based on a modified version of the Allais paradox proposed by Machina, which allows testing ordinal independence restricted to simple lotteries, i.e. the tail-separability property. The results tend to support RDEU models since tail-separability is not violated by 71% of subjects while 73% violate the independence condition of classic Allais paradox. This confirms the relative theoritical soundness of RDEU models over Expected Utility model for the particular context of risk.
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Bibliographic InfoArticle provided by AccessEcon in its journal Economics Bulletin.
Volume (Year): 4 (2008)
Issue (Month): 19 ()
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Find related papers by JEL classification:
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
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