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Common Consequence Conditions in Decision Making under Risk

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  • Wu, George
  • Gonzalez, Richard
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    Abstract

    We generalize the Allais common consequence effect by describing three common consequence effect conditions and characterizing their implications for the probability weighting function in rank-dependent expected utility. The three conditions--horizontal, vertical, and diagonal shifts within the probability triangle--are necessary and sufficient for different curvature properties of the probability weighting function. The first two conditions, shifts in probability mass from the lowest to middle outcomes and middle to highest outcomes respectively, are alternative conditions for concavity and convexity of the weighting function. The third condition, decreasing Pratt-Arrow absolute concavity, is consistent with recently proposed weighting functions. The three conditions collectively characterize where indifference curves fan out and where they fan in. The common consequence conditions indicate that for nonlinear weighting functions in the context of rank-dependent expected utility, there must exist a region where indifference curves fan out in one direction and fan in the other direction. Copyright 1998 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Journal of Risk and Uncertainty.

    Volume (Year): 16 (1998)
    Issue (Month): 1 (April)
    Pages: 115-39

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    Handle: RePEc:kap:jrisku:v:16:y:1998:i:1:p:115-39

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    Web page: http://www.springerlink.com/link.asp?id=100299

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    Cited by:
    1. Emily Haisley & Romel Mostafa & George Loewenstein, 2008. "Myopic risk-seeking: The impact of narrow decision bracketing on lottery play," Journal of Risk and Uncertainty, Springer, vol. 37(1), pages 57-75, August.
    2. Amnon Rapoport & Alison King Chung Lo & Rami Zwick, 2001. "Choice of Prizes Allocated by Multiple Lotteries with Endogenously Determined Probabilities," Experimental 0110003, EconWPA.
    3. Bruno S. Frey, 2005. "Knight Fever: Towards an Economics of Awards," CREMA Working Paper Series 2005-12, Center for Research in Economics, Management and the Arts (CREMA).
    4. Birnbaum, Michael H., 2007. "Tests of branch splitting and branch-splitting independence in Allais paradoxes with positive and mixed consequences," Organizational Behavior and Human Decision Processes, Elsevier, vol. 102(2), pages 154-173, March.
    5. Machina, Mark J, 2000. "Payoff Kinks in Preferences Over Lotteries," University of California at San Diego, Economics Working Paper Series qt7vn7d2hs, Department of Economics, UC San Diego.
    6. Daniel Cavagnaro & Mark Pitt & Richard Gonzalez & Jay Myung, 2013. "Discriminating among probability weighting functions using adaptive design optimization," Journal of Risk and Uncertainty, Springer, vol. 47(3), pages 255-289, December.
    7. George Wu & Jiao Zhang & Mohammed Abdellaoui, 2005. "Testing Prospect Theories Using Probability Tradeoff Consistency," Journal of Risk and Uncertainty, Springer, vol. 30(2), pages 107-131, January.
    8. Ido Erev & Ira Glozman & Ralph Hertwig, 2008. "What impacts the impact of rare events," Journal of Risk and Uncertainty, Springer, vol. 36(2), pages 153-177, April.
    9. Horst Zank, 2010. "On probabilities and loss aversion," Theory and Decision, Springer, vol. 68(3), pages 243-261, March.
    10. Birnbaum, Michael H., 2004. "Tests of rank-dependent utility and cumulative prospect theory in gambles represented by natural frequencies: Effects of format, event framing, and branch splitting," Organizational Behavior and Human Decision Processes, Elsevier, vol. 95(1), pages 40-65, September.
    11. Peter Brooks & Horst Zank, 2005. "Loss Averse Behavior," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 301-325, December.
    12. Humphrey, Steven J., 2000. "The common consequence effect: testing a unified explanation of recent mixed evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 41(3), pages 239-262, March.
    13. Wakker, Peter P., 2005. "Decision-foundations for properties of nonadditive measures: general state spaces or general outcome spaces," Games and Economic Behavior, Elsevier, vol. 50(1), pages 107-125, January.
    14. William Harbaugh & Kate Krause & Lise Vesterlund, 2002. "Risk Attitudes of Children and Adults: Choices Over Small and Large Probability Gains and Losses," Experimental Economics, Springer, vol. 5(1), pages 53-84, June.
    15. John Hey, 2005. "Why We Should Not Be Silent About Noise," Experimental Economics, Springer, vol. 8(4), pages 325-345, December.
    16. Michael H. Birnbaum & Jeffrey P. Bahra, 2012. "Separating response variability from structural inconsistency to test models of risky decision making," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 7(4), pages 402-426, July.
    17. Jouini, Elyès & Napp, Clotilde, 2012. "Behavioral Biases and the Representative Agent," Economics Papers from University Paris Dauphine 123456789/2319, Paris Dauphine University.
    18. Daniel Burghart & Paul Glimcher & Stephanie Lazzaro, 2013. "An expected utility maximizer walks into a bar..," Journal of Risk and Uncertainty, Springer, vol. 46(3), pages 215-246, June.
    19. Elyès Jouini & Clotilde Napp, 2012. "Behavioral biases and the representative agent," Theory and Decision, Springer, vol. 73(1), pages 97-123, July.
    20. Ulrich Schmidt & Stefan Trautmann, 2014. "Common consequence effects in pricing and choice," Theory and Decision, Springer, vol. 76(1), pages 1-7, January.
    21. Pavlo R. Blavatskyy, . "Axiomatization of a Preference for Most Probable Winner," IEW - Working Papers 230, Institute for Empirical Research in Economics - University of Zurich.

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