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Allais paradoxes can be reversed by presenting choices in canonical split form

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  • Birnbaum, Michael H.
  • Schmidt, Ulrich

Abstract

This paper tests Birnbaum's (2004) theory that the constant consequence paradoxes of Allais are due to violations of coalescing, the assumption that when two branches lead to the same consequence, they can be combined by adding their probabilities. Rank dependent utility and cumulative prospect theory imply that the Allais paradoxes are due to violations of restricted branch independence, a weaker form of Savage's sure thing axiom. This paper will analyze separately whether erroneous random response variation might be responsible for these two effects. When errors are factored out, violations of restricted branch independence also remain significant and opposite from the direction of Allais paradoxes, suggesting that models such as CPT that attribute Allais paradoxes to violations of restricted branch independence should be rejected.

Suggested Citation

  • Birnbaum, Michael H. & Schmidt, Ulrich, 2010. "Allais paradoxes can be reversed by presenting choices in canonical split form," Kiel Working Papers 1615, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1615
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    References listed on IDEAS

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    Cited by:

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    4. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2012. "Salience Theory of Choice Under Risk," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(3), pages 1243-1285.
    5. Tomasz Zalega, 2016. "Uncertainty and Risk in Mainstream Economics: An Outline (Niepewnosc i ryzyko w ekonomii glownego nurtu – zarys problematyki)," Research Reports, University of Warsaw, Faculty of Management, vol. 2(21), pages 80-95.

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    More about this item

    Keywords

    Independence axiom; splitting effects; coalescing; errors; experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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