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The Common Ratio Effect in Choice, Pricing, and Happiness Tasks

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  • Mark Schneider

    (Chapman University)

  • Mikhael Shor

    (University of Connecticut)

Abstract

The Allais common ratio effect is one of the most robust violations of rational decision making under risk. In this paper, we conduct a novel test of the common ratio effect in which we elicit preferences for the common ratio choice alternatives in choice, pricing, and happiness rating tasks. We find that both the consistency and distribution of responses differs systematically across tasks, with modal choices replicating the Allais preference pattern, modal happiness ratings exhibiting consistent risk aversion, and modal prices maximizing expected value. We discuss the predictions of various cognitive explanations of the common ratio effect in the context of our experiment. We find that a dual process framework provides the most complete account of our results. Surprisingly, we also find that although the Allais pattern was the modal behavior in the choice task, none of the 158 respondents in our experiment exhibited the Allais pattern simultaneously in choice, happiness, and pricing tasks. Our results constitute a new paradox for the leading theories of choice under risk. JEL Classification: Key words: Common Ratio Effect; Preference Reversals; Dual Processes; Happiness Ratings

Suggested Citation

  • Mark Schneider & Mikhael Shor, 2016. "The Common Ratio Effect in Choice, Pricing, and Happiness Tasks," Working papers 2016-29, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2016-29
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    11. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
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    13. Rubinstein, Ariel, 1988. "Similarity and decision-making under risk (is there a utility theory resolution to the Allais paradox?)," Journal of Economic Theory, Elsevier, vol. 46(1), pages 145-153, October.
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