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How common is the common-ratio effect?

Author

Listed:
  • Pavlo Blavatskyy

    (Montpellier Business School)

  • Valentyn Panchenko

    (UNSW Business School, UNSW)

  • Andreas Ortmann

    (UNSW Business School, UNSW)

Abstract

The common-ratio effect and the Allais Paradox (common-consequence effect) are the two best‐known violations of Expected Utility Theory. We reexamine data from 39 articles reporting experiments (143 designs/parameterizations, 14,909 observations) and find that the common-ratio effect is systematically affected by experimental design and implementation choices. The common-ratio effect is more likely to be observed in experiments with a low common-ratio factor, a high ratio of middle to highest outcome, when lotteries are presented as simple probability distributions (not in a compound/frequency form), and with high hypothetical incentives.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:expeco:v:26:y:2023:i:2:d:10.1007_s10683-022-09761-y
    DOI: 10.1007/s10683-022-09761-y
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    3. Christina McGranaghan & Kirby Nielsen & Ted O'Donoghue & Jason Somerville & Charles D. Sprenger, 2024. "Distinguishing Common Ratio Preferences from Common Ratio Effects Using Paired Valuation Tasks," American Economic Review, American Economic Association, vol. 114(2), pages 307-347, February.

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    More about this item

    Keywords

    Decision under risk; Experimental practices; Common-ratio effect; Expected Utility Theory; Allais Paradox;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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