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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.
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    Cited by:

    1. Mark J. Machina, 2009. "Risk, Ambiguity, and the Rank-Dependence Axioms," American Economic Review, American Economic Association, vol. 99(1), pages 385-392, March.
    2. Olivier L’Haridon & Lætitia Placido, 2010. "Betting on Machina’s reflection example: an experiment on ambiguity," Theory and Decision, Springer, vol. 69(3), pages 375-393, September.

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    JEL classification:

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

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