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An Allais paradox for generalized Expected Utility Theories ?

Author

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  • Laetitia Placido

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Olivier L'Haridon

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

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 theoretical 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 ?," PSE-Ecole d'économie de Paris (Postprint) hal-00645882, HAL.
    • Handle: RePEc:hal:pseptp:hal-00645882
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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. 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.
    2. Mark J. Machina, 2009. "Risk, Ambiguity, and the Rank-Dependence Axioms," American Economic Review, American Economic Association, vol. 99(1), pages 385-392, March.

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    More about this item

    Keywords

    Allais paradox; Rank-dependent utility;

    JEL classification:

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

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