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An allais paradox for generalized expected utility theories?

Author

Listed:
  • Laetitia Placido

    () (Greg-Hec, HEC Paris School of Management & CNRS)

  • Olivier L'Haridon

    () (Greg-Hec, HEC Paris School of Management & University Paris Sorbonne)

Abstract

This article reports the results of an experiment which aims at providing a test of ordinal independence, a necessary property of Generalized Expected Utility theories such as Rank-Dependent Expected Utility theory (RDEU). Our experiment is based on a modified version of the Allais paradox proposed by Machina, which allows testing ordinal independence restricted to simple lotteries, i.e. the tail-separability property. The results tend to support RDEU models since tail-separability is not violated by 71% of subjects while 73% violate the independence condition of classic Allais paradox. This confirms the relative theoritical soundness of RDEU models over Expected Utility model for the particular context of risk.

Suggested Citation

  • Laetitia Placido & Olivier L'Haridon, 2008. "An allais paradox for generalized expected utility theories?," Economics Bulletin, AccessEcon, vol. 4(19), pages 1-6.
  • Handle: RePEc:ebl:ecbull:eb-08d80019
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    References listed on IDEAS

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    1. Wakker, Peter P. & Zank, Horst, 2002. "A simple preference foundation of cumulative prospect theory with power utility," European Economic Review, Elsevier, vol. 46(7), pages 1253-1271, July.
    2. A. Marley & R. Luce, 2005. "Independence Properties Vis-À-Vis Several Utility Representations," Theory and Decision, Springer, pages 77-143.
    3. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    4. Grandmont, Jean-Michel, 1989. " Report on Maurice Allais' Scientific Work," Scandinavian Journal of Economics, Wiley Blackwell, pages 17-28.
    5. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    6. Wu, George, 1994. "An Empirical Test of Ordinal Independence," Journal of Risk and Uncertainty, Springer, vol. 9(1), pages 39-60, July.
    7. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    8. Uzi Segal, 1986. "Some Remarks on Quiggin's Anticipated Utility," UCLA Economics Working Papers 392, UCLA Department of Economics.
    9. Segal, Uzi, 1987. "Some remarks on Quiggin's anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 8(1), pages 145-154, March.
    10. Green, Jerry R & Jullien, Bruno, 1988. "Ordinal Independence in Nonlinear Utility Theory," Journal of Risk and Uncertainty, Springer, vol. 1(4), pages 355-387, December.
    11. 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, pages 332-382.
    12. Wakker, Peter & Erev, Ido & Weber, Elke U, 1994. "Comonotonic Independence: The Critical Test between Classical and Rank-Dependent Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 9(3), pages 195-230, December.
    13. Weber, Elke U & Kirsner, Britt, 1997. "Reasons for Rank-Dependent Utility Evaluation," Journal of Risk and Uncertainty, Springer, vol. 14(1), pages 41-61, January.
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    Cited by:

    1. Olivier L’Haridon & Lætitia Placido, 2010. "Betting on Machina’s reflection example: an experiment on ambiguity," Theory and Decision, Springer, pages 375-393.
    2. Mark J. Machina, 2009. "Risk, Ambiguity, and the Rank-Dependence Axioms," American Economic Review, American Economic Association, pages 385-392.

    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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