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The Relevance of Irrelevant Alternatives: An experimental investigation of risky choices

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Author Info
Eike B. Kroll () (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
Bodo Vogt () (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
Abstract

Experimental economists have discovered various violations of expected utility theory and offered alternative models that can explain laboratory results. This study discovers a new violation in risky choices that cannot be explained by theories like Prospect Theory, Disappoint- ment or Regret Theory. In an experimental setting using a between- subject design, the influence of a dominated alternative on certainty equivalents is shown. One group of subjects was offered a series of choices between a lottery ticket with a 50-50 chance of winning and a sure payoff. A second group was offered the same choice plus a third alternative, that as it turned out was not chosen by any participant. As a result, the average chosen sure payoff in the second group was higher than in the first group. That means, by adding a dominated alternative to a choice set, the certainty equivalent of a lottery is in- creased.

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Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 08028.

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Length: 11 pages
Date of creation: Sep 2008
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Handle: RePEc:mag:wpaper:08028

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  12. Slovic, Paul & Lichtenstein, Sarah, 1983. "Preference Reversals: A Broader Perspective," American Economic Review, American Economic Association, vol. 73(4), pages 596-605, September. [Downloadable!] (restricted)
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