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

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  • 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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File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2008_Dateien/2008_28.pdf
File Function: First version, 2008
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Bibliographic Info

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
Date of revision:
Handle: RePEc:mag:wpaper:08028

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  1. Slovic, Paul & Lichtenstein, Sarah, 1983. "Preference Reversals: A Broader Perspective," American Economic Review, American Economic Association, vol. 73(4), pages 596-605, September.
  2. Gilboa, Itzhak & Schmeidler, David, 1995. "Case-Based Decision Theory," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 605-39, August.
  3. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  5. Colin Camerer, 1998. "Bounded Rationality in Individual Decision Making," Experimental Economics, Springer, vol. 1(2), pages 163-183, September.
  6. Loomes, Graham & Starmer, Chris & Sugden, Robert, 1991. "Observing Violations of Transitivity by Experimental Methods," Econometrica, Econometric Society, vol. 59(2), pages 425-39, March.
  7. Sugden Robert, 1993. "An Axiomatic Foundation for Regret Theory," Journal of Economic Theory, Elsevier, vol. 60(1), pages 159-180, June.
  8. David P. Myatt, 2004. "On the Theory of Strategic Voting," Economics Series Working Papers 186, University of Oxford, Department of Economics.
  9. Robin Cubitt & Chris Starmer & Robert Sugden, 2001. "Discovered preferences and the experimental evidence of violations of expected utility theory," Journal of Economic Methodology, Taylor & Francis Journals, vol. 8(3), pages 385-414.
  10. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
  11. Mark J Machina, 1982. ""Expected Utility" Analysis without the Independence Axiom," Levine's Working Paper Archive 7650, David K. Levine.
  12. David J. Butler & Graham C. Loomes, 2007. "Imprecision as an Account of the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 97(1), pages 277-297, March.
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Cited by:
  1. Demuynck, Thomas, 2011. "The computational complexity of rationalizing boundedly rational choice behavior," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 425-433.

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