The effects of losses and event splitting on the Allais paradox
AbstractThe Allais Paradox, or common consequence effect, has been a standard challenge to normative theories of risky choice since its proposal over 60 years ago. However, neither its causes nor the conditions necessary to create the effect are well understood. Two experiments test the effects of losses and event splitting on the Allais Paradox. Experiment 1 found that the Allais Paradox occurs for both gain and mixed gambles and is reflected for loss gambles produced by reflection across the origin. Experiment 2 found that the Allais Paradox is eliminated by splitting the outcomes even when the probabilities used do not increase the salience of the common consequence. The results of Experiment 1 are consistent with Cumulative Prospect Theory, the current leading theory of risky choice. However, the results of Experiment 2 are problematic for Cumulative Prospect Theory and suggest that alternate explanations for the Allais Paradox must be sought.
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Bibliographic InfoArticle provided by Society for Judgment and Decision Making in its journal Judgment and Decision Making.
Volume (Year): 2 (2007)
Issue (Month): (April)
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risk; Allais Paradox; certainty effect; preference reversals; mixed gambles; event splitting; Prospect Theory; Cumulative Prospect Theory.;
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