IDEAS home Printed from https://ideas.repec.org/p/zur/iewwpx/478.html
   My bibliography  Save this paper

Reverse Common Ratio Effect

Author

Listed:
  • Pavlo R. Blavatskyy

Abstract

The results of a new experimental study reveal highly systematic violations of expected utility theory. The pattern of these violations is exactly the opposite of the classical common ratio effect discovered by Allais (1953). Two recent decision theories� stochastic expected utility theory (Blavatskyy, 2007) and perceived relative argument model (Loomes, 2008)�predicted the existence of a reverse common ratio effect. However, these theories can rationalize only one part of the new experimental data reported in this paper. The other part appears to be neither predicted by existing theories nor documented in the existing empirical studies.

Suggested Citation

  • Pavlo R. Blavatskyy, 2010. "Reverse Common Ratio Effect," IEW - Working Papers 478, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:478
    as

    Download full text from publisher

    File URL: https://www.econ.uzh.ch/apps/workingpapers/wp/iewwp478.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Loomes, Graham & Sugden, Robert, 1998. "Testing Different Stochastic Specifications of Risky Choice," Economica, London School of Economics and Political Science, vol. 65(260), pages 581-598, November.
    2. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    3. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    4. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-686, May.
    5. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    6. Graham Loomes, 2005. "Modelling the Stochastic Component of Behaviour in Experiments: Some Issues for the Interpretation of Data," Experimental Economics, Springer;Economic Science Association, vol. 8(4), pages 301-323, December.
    7. Viscusi, W Kip, 1989. "Prospective Reference Theory: Toward an Explanation of the Paradoxes," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 235-263, September.
    8. David J. Butler & Graham C. Loomes, 2007. "Imprecision as an Account of the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 97(1), pages 277-297, March.
    9. Pavlo R. Blavatskyy, "undated". "A Stochastic Expected Utility Theory," IEW - Working Papers 231, Institute for Empirical Research in Economics - University of Zurich.
    10. Loomes, Graham & Sugden, Robert, 1995. "Incorporating a stochastic element into decision theories," European Economic Review, Elsevier, vol. 39(3-4), pages 641-648, April.
    11. Conlisk, John, 1989. "Three Variants on the Allais Example," American Economic Review, American Economic Association, vol. 79(3), pages 392-407, June.
    12. Pavlo Blavatskyy, 2007. "Stochastic expected utility theory," Journal of Risk and Uncertainty, Springer, vol. 34(3), pages 259-286, June.
    13. Graham Loomes & Robert Sugden, 1998. "Testing Different Stochastic Specificationsof Risky Choice," Economica, London School of Economics and Political Science, vol. 65(260), pages 581-598, November.
    14. Camerer, Colin F, 1989. "An Experimental Test of Several Generalized Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 61-104, April.
    15. Battalio, Raymond C & Kagel, John H & Jiranyakul, Komain, 1990. "Testing between Alternative Models of Choice under Uncertainty: Some Initial Results," Journal of Risk and Uncertainty, Springer, vol. 3(1), pages 25-50, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Simone Cerreia‐Vioglio & David Dillenberger & Pietro Ortoleva, 2015. "Cautious Expected Utility and the Certainty Effect," Econometrica, Econometric Society, vol. 83, pages 693-728, March.
    2. Adriani, Fabrizio & Sonderegger, Silvia, 2020. "Optimal similarity judgments in intertemporal choice (and beyond)," Journal of Economic Theory, Elsevier, vol. 190(C).
    3. Thomas Epper & Helga Fehr-Duda, 2012. "The missing link: unifying risk taking and time discounting," ECON - Working Papers 096, Department of Economics - University of Zurich, revised Oct 2018.
    4. Keiran Sharpe, 2023. "On the Ellsberg and Machina paradoxes," Theory and Decision, Springer, vol. 95(4), pages 539-573, November.
    5. 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.
    6. Graham Loomes & Ganna Pogrebna, 2014. "Testing for independence while allowing for probabilistic choice," Journal of Risk and Uncertainty, Springer, vol. 49(3), pages 189-211, December.
    7. Oben K. Bayrak & John D. Hey, 2020. "Decisions under risk: Dispersion and skewness," Journal of Risk and Uncertainty, Springer, vol. 61(1), pages 1-24, August.
    8. A. Nebout & D. Dubois, 2014. "When Allais meets Ulysses: Dynamic axioms and the common ratio effect," Journal of Risk and Uncertainty, Springer, vol. 48(1), pages 19-49, February.
    9. Michał Krawczyk, 2014. "Probability weighting in different domains: the role of stakes, fungibility, and affect," Working Papers 2014-15, Faculty of Economic Sciences, University of Warsaw.
    10. Epper, Thomas & Fehr-Duda, Helga, 2017. "A Tale of Two Tails: On the Coexistence of Overweighting and Underweighting of Rare Extreme Events," Economics Working Paper Series 1705, University of St. Gallen, School of Economics and Political Science.
    11. Blavatskyy, Pavlo, 2018. "Fechner’s strong utility model for choice among n>2 alternatives: Risky lotteries, Savage acts, and intertemporal payoffs," Journal of Mathematical Economics, Elsevier, vol. 79(C), pages 75-82.
    12. Blavatskyy, Pavlo, 2016. "Probability weighting and L-moments," European Journal of Operational Research, Elsevier, vol. 255(1), pages 103-109.
    13. Noémi Berlin & Jean-Louis Tavani & Maud Beasançon, 2016. "An exploratory study of creativity, personality and schooling achievement," Education Economics, Taylor & Francis Journals, vol. 24(5), pages 536-556, September.
    14. Bernheim, B. Douglas & Sprenger, Charles, 2023. "On the empirical validity of cumulative prospect theory: A response to the Wakker commentaries," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 107(C).
    15. Blavatskyy, Pavlo R., 2013. "The reverse Allais paradox," Economics Letters, Elsevier, vol. 119(1), pages 60-64.
    16. Ulrich Schmidt & Christian Seidl, 2014. "Reconsidering the common ratio effect: the roles of compound independence, reduction, and coalescing," Theory and Decision, Springer, vol. 77(3), pages 323-339, October.
    17. Pavlo Blavatskyy, 2018. "Why do young women marry old men?," Theory and Decision, Springer, vol. 85(3), pages 509-525, October.
    18. Pavlo R. Blavatskyy, 2016. "A monotone model of intertemporal choice," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(4), pages 785-812, October.
    19. Pavlo Blavatskyy & Valentyn Panchenko & Andreas Ortmann, 2023. "How common is the common-ratio effect?," Experimental Economics, Springer;Economic Science Association, vol. 26(2), pages 253-272, April.
    20. Pavlo Blavatskyy, 2018. "A second-generation disappointment aversion theory of decision making under risk," Theory and Decision, Springer, vol. 84(1), pages 29-60, January.
    21. Blavatskyy, Pavlo R., 2012. "The Troika paradox," Economics Letters, Elsevier, vol. 115(2), pages 236-239.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pavlo Blavatskyy, 2010. "Reverse common ratio effect," Journal of Risk and Uncertainty, Springer, vol. 40(3), pages 219-241, June.
    2. Nathaniel T. Wilcox, 2015. "Error and Generalization in Discrete Choice Under Risk," Working Papers 15-11, Chapman University, Economic Science Institute.
    3. Pavlo Blavatskyy, 2018. "A second-generation disappointment aversion theory of decision making under risk," Theory and Decision, Springer, vol. 84(1), pages 29-60, January.
    4. Krzysztof Kontek, 2018. "Boundary effects in the Marschak-Machina triangle," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 13(6), pages 587-606, November.
    5. repec:cup:judgdm:v:13:y:2018:i:6:p:587-606 is not listed on IDEAS
    6. John Hey, "undated". "Experiments and the Economics of Individual Decision Making Under Risk and Uncertainty," Discussion Papers 95/49, Department of Economics, University of York.
    7. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-1289, November.
    8. Michael H. Birnbaum & Ulrich Schmidt & Miriam D. Schneider, 2017. "Testing independence conditions in the presence of errors and splitting effects," Journal of Risk and Uncertainty, Springer, vol. 54(1), pages 61-85, February.
    9. Wilcox, Nathaniel T., 2011. "'Stochastically more risk averse:' A contextual theory of stochastic discrete choice under risk," Journal of Econometrics, Elsevier, vol. 162(1), pages 89-104, May.
    10. Pavlo Blavatskyy, 2007. "Stochastic expected utility theory," Journal of Risk and Uncertainty, Springer, vol. 34(3), pages 259-286, June.
    11. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten Igel & Rutström, Elisabet E., 2010. "Behavioral econometrics for psychologists," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 553-576, August.
    12. Pavlo R. Blavatskyy, "undated". "A Stochastic Expected Utility Theory," IEW - Working Papers 231, Institute for Empirical Research in Economics - University of Zurich.
    13. Belianin, A., 2017. "Face to Face to Human Being: Achievements and Challenges of Behavioral Economics," Journal of the New Economic Association, New Economic Association, vol. 34(2), pages 166-175.
    14. Pavlo Blavatskyy & Valentyn Panchenko & Andreas Ortmann, 2023. "How common is the common-ratio effect?," Experimental Economics, Springer;Economic Science Association, vol. 26(2), pages 253-272, April.
    15. Blavatskyy, Pavlo, 2015. "Behavior in the centipede game: A decision-theoretical perspective," Economics Letters, Elsevier, vol. 133(C), pages 117-122.
    16. Simone Cerreia‐Vioglio & David Dillenberger & Pietro Ortoleva, 2015. "Cautious Expected Utility and the Certainty Effect," Econometrica, Econometric Society, vol. 83, pages 693-728, March.
    17. Blavatskyy, Pavlo R., 2006. "Violations of betweenness or random errors?," Economics Letters, Elsevier, vol. 91(1), pages 34-38, April.
    18. Kontek, Krzysztof, 2015. "Fanning-Out or Fanning-In? Continuous or Discontinuous? Estimating Indifference Curves Inside the Marschak-Machina Triangle using Certainty Equivalents," MPRA Paper 63965, University Library of Munich, Germany.
    19. Zvi Safra & Uzi Segal, 2005. "Are Universal Preferences Possible? Calibration Results for Non-Expected Utility Theories," Boston College Working Papers in Economics 633, Boston College Department of Economics.
    20. Aurora García-Gallego & Nikolaos Georgantzís & Daniel Navarro-Martínez & Gerardo Sabater-Grande, 2011. "The stochastic component in choice and regression to the mean," Theory and Decision, Springer, vol. 71(2), pages 251-267, August.
    21. Bruno S. Frey, "undated". "Knight Fever towards an Economics of Awards," IEW - Working Papers 239, Institute for Empirical Research in Economics - University of Zurich.

    More about this item

    Keywords

    Expected utility theory; common ratio effect; Allais paradox; risk; experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zur:iewwpx:478. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Severin Oswald (email available below). General contact details of provider: .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.