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Does the Allais paradox survive with non-monetary consequences?

Author

Listed:
  • Arroyos-Calvera, Danae
  • Isoni, Andrea
  • Loomes, Graham
  • McDonald, Rebecca

Abstract

The form of the Allais paradox known as the common ratio effect (CRE) is a violation of deterministic expected utility theory that has been widely replicated with monetary outcomes. Its robustness has stimulated the development of numerous alternative models of risky choice. However, much less is known about the prevalence of the CRE in decisions involving non-monetary outcomes. We conduct a controlled laboratory comparison of the CRE for money versus consumer goods. The CRE is very strong with money, but largely disappears for goods, primarily as a result of differences in risk attitudes between goods and money. We caution against assuming that findings from experiments involving monetary lotteries will reliably generalise to other types of consequences.

Suggested Citation

  • Arroyos-Calvera, Danae & Isoni, Andrea & Loomes, Graham & McDonald, Rebecca, 2024. "Does the Allais paradox survive with non-monetary consequences?," Economics Letters, Elsevier, vol. 244(C).
    • Handle: RePEc:eee:ecolet:v:244:y:2024:i:c:s0165176524005184
    DOI: 10.1016/j.econlet.2024.112034
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    References listed on IDEAS

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    More about this item

    Keywords

    Common ratio effect; Allais paradox; Consumer goods; Risk attitudes;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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