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A Systematic Test of the Independence Axiom Near Certainty

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Abstract

A large literature has documented violations of expected utility consistent with a preference for certainty (the “certainty effect”). We design a laboratory experiment to investigate the role of the certainty effect in explaining violations of the independence axiom. We use lotteries spanning over the entire probability simplex to detect violations systematically. We find that violations of independence consistent with the reverse certainty effect are much more common than violations consistent with the certainty effect. Results hold as we test robustness along two dimensions: varying the mixing lottery and moving slightly away from certainty.

Suggested Citation

  • Ritesh Jain & Kirby Nielsen, 2020. "A Systematic Test of the Independence Axiom Near Certainty," IEAS Working Paper : academic research 20-A001, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    • Handle: RePEc:sin:wpaper:20-a001
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    File URL: https://www.econ.sinica.edu.tw/~econ/pdfPaper/20-A001(all).pdf
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    Keywords

    : independence axiom; expected utility theory; certainty effect; Allais Paradox;
    All these keywords.

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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