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When Allais meets Ulysses: Dynamic axioms and the common ratio effect

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  • A. Nebout
  • D. Dubois

Abstract

We report experimental findings about subjects’ behavior in dynamic decision problems involving multistage lotteries with different timings of resolution of uncertainty. Our within-subject design allows us to study violations of the independence and dynamic axioms: Dynamic Consistency, Consequentialism and Reduction of Compound Lotteries. We investigate the effects of changes in probability and outcome levels on the pattern of choices observed in the Common Ratio Effect (CRE) and in the Reverse Common Ratio Effect (RCRE) and on their dynamic counterparts. We find that the probability level plays an important role in violations of Reduction of Compound Lottery and Dynamic Consistency and the outcomes levels in violations of Consequentialism. Moreover, more than one quarter of our subjects satisfy the Independence axiom but violate two dynamic axioms. We thus suggest that there is a greater dissociation that might have been expected between preferences captured by dynamic axioms and those observed over single-stage lotteries. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • A. Nebout & D. Dubois, 2014. "When Allais meets Ulysses: Dynamic axioms and the common ratio effect," Journal of Risk and Uncertainty, Springer, vol. 48(1), pages 19-49, February.
    • Handle: RePEc:kap:jrisku:v:48:y:2014:i:1:p:19-49
    DOI: 10.1007/s11166-014-9184-1
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    Cited by:

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    2. Michael L. DeKay & Dan R. Schley & Seth A. Miller & Breann M. Erford & Jonghun Sun & Michael N. Karim & Mandy B. Lanyon, 2016. "The persistence of common-ratio effects in multiple-play decisions," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 11(4), pages 361-379, July.
    3. Thomas Epper & Helga Fehr-Duda, 2012. "The missing link: unifying risk taking and time discounting," ECON - Working Papers 096, Department of Economics - University of Zurich, revised Oct 2018.
    4. Epper, Thomas & Fehr-Duda, Helga, 2017. "A Tale of Two Tails: On the Coexistence of Overweighting and Underweighting of Rare Extreme Events," Economics Working Paper Series 1705, University of St. Gallen, School of Economics and Political Science.
    5. Bernasconi, Michele & Bernhofer, Juliana, 2020. "Catch Me If You Can: Testing the reduction of compound lotteries axiom in a tax compliance experiment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).
    6. repec:cup:judgdm:v:11:y:2016:i:4:p:361-379 is not listed on IDEAS
    7. Antoine Nebout & Marc Willinger, 2014. "Are Non-Expected Utility individuals really Dynamically Inconsistent? Experimental Evidence," Working Papers 14-08, LAMETA, Universtiy of Montpellier, revised Jul 2014.
    8. Esponda, Ignacio & Vespa, Emanuel, 2023. "Contingent Thinking and the Sure-Thing Principle: Revisiting Classic Anomalies in the Laboratory#," University of California at San Diego, Economics Working Paper Series qt32j4d5z2, Department of Economics, UC San Diego.
    9. Pavlo Blavatskyy & Valentyn Panchenko & Andreas Ortmann, 2023. "How common is the common-ratio effect?," Experimental Economics, Springer;Economic Science Association, vol. 26(2), pages 253-272, April.
    10. Hammond, Peter J. & Zank, Horst, 2013. "Rationality and Dynamic Consistency under Risk and Uncertainty," Economic Research Papers 270426, University of Warwick - Department of Economics.

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    More about this item

    Keywords

    Decision theory; Experiment; Independence axiom; Dynamic consistency; Consequentialism; C91; D81;
    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

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