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Testing of the 'reduction of compound alternatives' principle

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  • Keller, L Robin

Abstract

This paper reports an empirical investigation of the effects of three pictorial forms of problem representation on conformance with the Reduction of Compound Alternatives Principle of expected utility theory. The most common form of representation, written problem statements, was compared with three pictorial representations: tubes containing one hundred labeled balls, decision matrices with each column proportional in size to the probability of the corresponding event, and bar graphs. The tubes representation led to fewer violations of the Principle. In addition, when subjects were trained to construct proportional matrices from written problem statements, they exhibited fewer violations than those who received the same problems already formatted in proportional matrices. The results reported here should contribute to the development of a theory of the way people frame decision problems.

Suggested Citation

  • Keller, L Robin, 1985. "Testing of the 'reduction of compound alternatives' principle," Omega, Elsevier, vol. 13(4), pages 349-358.
    • Handle: RePEc:eee:jomega:v:13:y:1985:i:4:p:349-358
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    Cited by:

    1. Adrian Bruhin & Maha Manai & Luís Santos-Pinto, 2022. "Risk and rationality: The relative importance of probability weighting and choice set dependence," Journal of Risk and Uncertainty, Springer, vol. 65(2), pages 139-184, October.
    2. Kaivanto, Kim & Kroll, Eike B., 2012. "Negative recency, randomization device choice, and reduction of compound lotteries," Economics Letters, Elsevier, vol. 115(2), pages 263-267.
    3. Saurabh Bansal & Yaroslav Rosokha, 2018. "Impact of Compound and Reduced Specification on Valuation of Projects with Multiple Risks," Decision Analysis, INFORMS, vol. 15(1), pages 27-46, March.
    4. Adam Oliver, 2003. "Testing rank‐dependent utility theory for health outcomes," Health Economics, John Wiley & Sons, Ltd., vol. 12(10), pages 863-871, October.
    5. Bikhchandani, Sushil & Segal, Uzi & Sharma, Sunil, 1992. "Stochastic dominance under Bayesian learning," Journal of Economic Theory, Elsevier, vol. 56(2), pages 352-377, April.
    6. Amélie Vrijdags, 2010. "An experimental investigation of transitivity in set ranking," Theory and Decision, Springer, vol. 68(1), pages 213-232, February.
    7. Kim Kaivanto & Eike Kroll, 2014. "Alternation bias and reduction in St. Petersburg gambles," Working Papers 65600286, Lancaster University Management School, Economics Department.

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