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Negative recency, randomization device choice, and reduction of compound lotteries

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  • Kaivanto, Kim
  • Kroll, Eike Benjamin

Abstract

We report an experiment in which subjects are not indifferent between real-money lotteries implemented with randomization devices that are equivalent under the Reduction Axiom. Instead choice behavior is consistent with subjective distortion of conditional probability, and this persists in treatment conditions that control for (i) computational limitations and (ii) possible confounding by ratio bias. --

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Bibliographic Info

Paper provided by Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering in its series Working Paper Series in Economics with number 22.

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Date of creation: 2011
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Handle: RePEc:zbw:kitwps:22

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Web page: http://www.wiwi.kit.edu/
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Related research

Keywords: reduction of compound lotteries; negative recency effect; gambler's fallacy; law of small numbers; randomization devices; instruments and materials; design of experiments; St. Petersburg paradox;

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  1. Conlisk, John, 1989. "Three Variants on the Allais Example," American Economic Review, American Economic Association, vol. 79(3), pages 392-407, June.
  2. Rachel Croson & James Sundali, 2005. "The Gambler’s Fallacy and the Hot Hand: Empirical Data from Casinos," Journal of Risk and Uncertainty, Springer, vol. 30(3), pages 195-209, May.
  3. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
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  6. Terrell, Dek, 1994. "A Test of the Gambler's Fallacy: Evidence from Pari-mutuel Games," Journal of Risk and Uncertainty, Springer, vol. 8(3), pages 309-17, May.
  7. Halevy, Yoram, 2005. "Ellsberg Revisited: an Experimental Study," Microeconomics.ca working papers halevy-05-07-26-11-51-13, Vancouver School of Economics, revised 25 Feb 2014.
  8. Carlin, Paul S., 1992. "Violations of the reduction and independence axioms in Allais-type and common-ratio effect experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 19(2), pages 213-235, October.
  9. Keller, L Robin, 1985. "Testing of the 'reduction of compound alternatives' principle," Omega, Elsevier, vol. 13(4), pages 349-358.
  10. Terrell, Dek, 1998. "Biases in Assessments of Probabilities: New Evidence from Greyhound Races," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 151-66, November.
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  12. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  13. Haigh, Michael S. & List, John A., 2002. "Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis," Working Papers 28554, University of Maryland, Department of Agricultural and Resource Economics.
  14. Jose-Luis Pinto-Prades & Jorge-Eduardo Martinez-Perez & Jose-Maria Abellan-Perpinan, 2006. "The influence of the ratio bias phenomenon on the elicitation of health states utilities," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 1, pages 118-133, November.
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  16. Pingle, Mark, 2010. "Looking under the hood: Exploring assumptions and finding behavioral economics," Journal of Economic Behavior & Organization, Elsevier, vol. 73(1), pages 73-76, January.
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  19. Kaivanto, Kim, 2008. "Alternation Bias and the Parameterization of Cumulative Prospect Theory," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 91-107.
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Citations

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Cited by:
  1. Paolo Crosetto & Antonio Filippin, 2013. "A Theoretical and Experimental Appraisal of Five Risk Elicitation Methods," SOEPpapers on Multidisciplinary Panel Data Research 547, DIW Berlin, The German Socio-Economic Panel (SOEP).
  2. Trautmann, Stefan T & Zeckhauser, Richard Jay, 2011. "Shunning Uncertainty: The Neglect of Learning Opportunities," Scholarly Articles 5347068, Harvard Kennedy School of Government.
  3. Crosetto, Paolo & Filippin, Antonio, 2012. "The "Bomb" Risk Elicitation Task," IZA Discussion Papers 6710, Institute for the Study of Labor (IZA).

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