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Dynamic Choice and the Common Ratio Effect: An Experimental Investigation

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Author Info
Cubitt, Robin P
Starmer, Chris
Sugden, Robert

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Abstract

The common ratio effect is a well-attested violation of expected utility theory. This paper uses four principles of dynamic choice to characterize alternative theoretical strategies for explaining the effect. It reports an experiment which tests these principles and, by implication, several well-known accounts of the common ratio effect. Unlike previous work, the experimental design uses real financial incentives without presupposing any dynamic choice principles. The authors find violation of a principle of 'timing independence' which is part of most existing theories of dynamic choice. They examine the implications of this finding for decision theory and economics.

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Publisher Info
Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 108 (1998)
Issue (Month): 450 (September)
Pages: 1362-80
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Handle: RePEc:ecj:econjl:v:108:y:1998:i:450:p:1362-80

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  1. John Hey, . "Do People (Want to) Plan?," Discussion Papers 99/22, Department of Economics, University of York. [Downloadable!]
    Other versions:
  2. Robin P. Cubitt & Chris Starmer & Robert Sugden, 2001. "Discovered preferences and the experimental evidence of violations of expected utility theory," Journal of Economic Methodology, Taylor and Francis Journals, vol. 8(3), pages 385-414, November. [Downloadable!] (restricted)
  3. John Bone & John D Hey & John Suckling, 2006. "Do People Plan?," Discussion Papers 06/22, Department of Economics, University of York, revised Jul 2007. [Downloadable!]
    Other versions:
  4. Ronald Bosman & Frans van Winden, 2001. "Anticipated and Experienced Emotions in an Investment Experiment," Tinbergen Institute Discussion Papers 01-058/1, Tinbergen Institute. [Downloadable!]
  5. Robin Cubitt & Maria Ruiz-Martos & Chris Starmer, 2005. "Are bygones bygones?," Discussion Papers 2005-21, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham. [Downloadable!]
  6. John D Hey & Gianna Lotito, 2007. "Naïve, Resolute or Sophisticated? A Study of Dynamic Decision Making," Discussion Papers 07/03, Department of Economics, University of York. [Downloadable!]
    Other versions:
  7. John Hey & Massimo Paradiso., . "Dynamic Choice and Timing-Independence: an experimental investigation," Discussion Papers 99/26, Department of Economics, University of York. [Downloadable!]
  8. Astrid Hopfensitz & Frans van Winden, 2006. "Dynamic Choice, Independence and Emotions," Tinbergen Institute Discussion Papers 06-087/1, Tinbergen Institute. [Downloadable!]
    Other versions:
  9. Ronald Bosman & Frans van Winden, 2006. "Global Risk, Investment, and Emotions," DNB Working Papers 112, Netherlands Central Bank, Research Department. [Downloadable!]
  10. Marciano Siniscalchi, 2006. "Dynamic Choice Under Ambiguity," Discussion Papers 1430, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  11. Nicholas Bardsley, 2000. "Control without Deception," Tinbergen Institute Discussion Papers 00-107/1, Tinbergen Institute. [Downloadable!]
  12. Nicholas Bardsley, 2000. "Control Without Deception: Individual Behaviour in Free-Riding Experiments Revisited," Experimental Economics, Springer, vol. 3(3), pages 215-240, December. [Downloadable!] (restricted)
  13. E. Elisabet Rutstrom & Glenn W. Harrison & Morten I. Lau, 2004. "Estimating Risk Attitudes in Denmark," Econometric Society 2004 Australasian Meetings 201, Econometric Society. [Downloadable!]
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