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The Independence Axiom and the Bipolar Behaviorist

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  • Glenn W. Harrison
  • J. Todd Swarthout

Abstract

Developments in the theory of risk require yet another evaluation of the behavioral validity of the independence axiom. This axiom plays a central role in most formal statements of expected utility theory, as well as popular alternative models of decision-making under risk, such as rank-dependent utility theory. It also plays a central role in experiments used to characterize the way in which risk preferences deviate from expected utility theory. If someone claims that individuals behave as if they "probability weight" outcomes, and hence violate the independence axiom, it is invariably on the basis of experiments that must assume the independence axiom. We refer to this as the Bipolar Behavioral Hypothesis: behavioral economists are pessimistic about the axiom when it comes to characterizing how individuals directly evaluate two lotteries in a binary choice task, but are optimistic about the axiom when it comes to characterizing how individuals evaluate multiple lotteries that make up the incentive structure for a multiple-task experiment. Building on designs that have a long tradition in experimental economics, we offer direct tests of the axiom and the evidence for probability weighting. We reject the Bipolar Behavioral Hypothesis: we find that nonparametric preferences estimated for the rank-dependent utility model are significantly affected when one elicits choices with procedures that require the independence assumption, as compared to choices with procedures that do not require that assumption. We also demonstrate this result with familiar parametric preference specifications, and draw general implications for the empirical evaluation of theories about risk.

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Bibliographic Info

Paper provided by Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University in its series Experimental Economics Center Working Paper Series with number 2012-01.

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Length: 63
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:exc:wpaper:2012-01

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  1. Fan, Chinn-Ping, 2002. "Allais paradox in the small," Journal of Economic Behavior & Organization, Elsevier, vol. 49(3), pages 411-421, November.
  2. Burke, Michael S, et al, 1996. "An Experimental Note on the Allais Paradox and Monetary Incentives," Empirical Economics, Springer, vol. 21(4), pages 617-32.
  3. Hans Binswanger, 1980. "Attitudes toward risk: Experimental measurement in rural india," Artefactual Field Experiments 00009, The Field Experiments Website.
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Cited by:
  1. Antonio FILIPPIN & Paolo CROSETTO, 2014. "A Reconsideration of Gender Differences in Risk Attitudes," Departmental Working Papers 2014-01, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  2. Paolo Crosetto & Antonio Filippin, 2013. "A Theoretical and Experimental Appraisal of Five Risk Elicitation Methods," Jena Economic Research Papers 2013-009, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  3. Drichoutis, Andreas & Nayga, Rodolfo, 2013. "A reconciliation of time preference elicitation methods," MPRA Paper 46916, University Library of Munich, Germany, revised 12 May 2013.
  4. Sujoy Mukerji & Robin Cubitt & Gijs van de Kuilen, 2014. "Discriminating between Models of Ambiguity Attitude: A Qualitative Test," Economics Series Working Papers 692, University of Oxford, Department of Economics.
  5. Lionel Page & David A. Savage & Benno Torgler, 2013. "Variation in risk seeking behavior following large losses: A natural experiment," QuBE Working Papers 007, QUT Business School.
  6. Glenn W. Harrison & Jimmy Martínez-Correa & J. Todd Swarthout & Eric R. Ulm, 2012. "Scoring Rules for Subjective Probability Distributions," Experimental Economics Center Working Paper Series 2012-18, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.

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