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The impact of statistical learning on violations of the sure-thing principle

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  • Nicky Nicholls

    ()
    (Department of Economics, University of Pretoria)

  • Aylit Romm

    ()
    (School of Economic and Business Sciences, University of the Witwatersrand, Johannesburg, South Africa)

  • Alexander Zimper

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper experimentally tests whether violations of Savage's (1954) subjective expected utility theory decrease if the ambiguity of an uncertain decision situation is reduced through statistical learning. Because our data does not show such a decrease, existing models which formalize ambiguity within an Anscombe-Aumann (1963) framework--thereby reducing to expected utility theory in the absence of ambiguity--are violated. In contrast, axiomatic models of prospect theory can accommodate our experimental findings because they allow for violations of von Neumann and Morgenstern's (1947) independence axiom whenever uncertain decision situations transform into risky decision situations for which probabilities are known.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201364.

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Length: 26 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:pre:wpaper:201364

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Related research

Keywords: Prospect Theory; Choquet Expected Utility Theory; Multiple Priors Expected Utility Theory; Sure Thing Principle; Independence Axiom;

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References

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  1. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
  2. Wakker, Peter & Tversky, Amos, 1993. " An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 147-75, October.
  3. Viscusi, W. Kip, 1985. "A Bayesian perspective on biases in risk perception," Economics Letters, Elsevier, vol. 17(1-2), pages 59-62.
  4. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
  5. Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 16(1), pages 65-88, February.
  6. Viscusi, W Kip & O'Connor, Charles J, 1984. "Adaptive Responses to Chemical Labeling: Are Workers Bayesian Decision Makers?," American Economic Review, American Economic Association, vol. 74(5), pages 942-56, December.
  7. Mohammed Abdellaoui & Aurelien Baillon & Laetitia Placido & Peter P. Wakker, 2011. "The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation," American Economic Review, American Economic Association, vol. 101(2), pages 695-723, April.
  8. Massimo Marinacci, 2002. "Learning from ambiguous urns," Statistical Papers, Springer, vol. 43(1), pages 143-151, January.
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