IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The Independence Axiom and the Bipolar Behaviorist

  • Glenn W. Harrison
  • J. Todd Swarthout

Developments in the theory of risk require yet another evaluation of the behavioral validity of the independence axiom. This axiom plays a central role in most formal statements of expected utility theory, as well as popular alternative models of decision-making under risk, such as rank-dependent utility theory. It also plays a central role in experiments used to characterize the way in which risk preferences deviate from expected utility theory. If someone claims that individuals behave as if they "probability weight" outcomes, and hence violate the independence axiom, it is invariably on the basis of experiments that must assume the independence axiom. We refer to this as the Bipolar Behavioral Hypothesis: behavioral economists are pessimistic about the axiom when it comes to characterizing how individuals directly evaluate two lotteries in a binary choice task, but are optimistic about the axiom when it comes to characterizing how individuals evaluate multiple lotteries that make up the incentive structure for a multiple-task experiment. Building on designs that have a long tradition in experimental economics, we offer direct tests of the axiom and the evidence for probability weighting. We reject the Bipolar Behavioral Hypothesis: we find that nonparametric preferences estimated for the rank-dependent utility model are significantly affected when one elicits choices with procedures that require the independence assumption, as compared to choices with procedures that do not require that assumption. We also demonstrate this result with familiar parametric preference specifications, and draw general implications for the empirical evaluation of theories about risk.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2012-01.pdf
Download Restriction: no

Paper provided by Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University in its series Experimental Economics Center Working Paper Series with number 2012-01.

as
in new window

Length: 63
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:exc:wpaper:2012-01
Contact details of provider: Postal: (404) 651-3990
Phone: (404) 651-3990
Fax: (404) 651-3996
Web page: http://excen.gsu.edu/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Burke, Michael S, et al, 1996. "An Experimental Note on the Allais Paradox and Monetary Incentives," Empirical Economics, Springer, vol. 21(4), pages 617-32.
  2. Fan, Chinn-Ping, 2002. "Allais paradox in the small," Journal of Economic Behavior & Organization, Elsevier, vol. 49(3), pages 411-421, November.
  3. Hans Binswanger, 1980. "Attitudes toward risk: Experimental measurement in rural india," Artefactual Field Experiments 00009, The Field Experiments Website.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:exc:wpaper:2012-01. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (J. Todd Swarthout)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.