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An experimental investigation of the Allais paradox with subjective probabilities and correlated outcomes

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  • Ostermair, Christoph

Abstract

Skew-symmetric additive decision theories such as salience theory assume that individuals adhere to Savage’s sure-thing principle. The present paper investigates that assumption in an incentivized lab experiment using Allais-type choice problems with subjective probabilities. Real-world events are employed to implement an easy-to-understand correlation structure between outcomes. We control for the role of display formats by presenting each choice problem in a coalesced format and an event-splitting format that clearly reveals the state space and the underlying correlation structure to subjects. We find the Allais paradox to be present in both display formats, which contradicts the rationale of skew-symmetric additive models such as salience theory. Because of significant event-splitting effects, Allais-type preferences are more pronounced in the coalesced format. The event-splitting effects obtained suggest that subjects assign a higher value to a lottery when the event of disbursement of its upside payoff is split into subevents. This holds both when event-splitting helps to unveil the state space and when it does not. Previous findings on correlated versions of the Allais paradox can be explained partially by event-splitting rather than correlation.

Suggested Citation

  • Ostermair, Christoph, 2022. "An experimental investigation of the Allais paradox with subjective probabilities and correlated outcomes," Journal of Economic Psychology, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:joepsy:v:93:y:2022:i:c:s0167487022000654
    DOI: 10.1016/j.joep.2022.102553
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    More about this item

    Keywords

    Skew-symmetric additive models; Salience theory; Allais paradox; Common consequence effect; Framing effects; Event-splitting;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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