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Individual Dynamic Choice Behaviour and the Common Consequence Effect

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  • Maria J. Ruiz Martos

    (Department of Economic Theory and Economic History, University of Granada.)

Abstract

What should you do when confronting a sequence of decisions such that you make some choices and chance makes some others, i.e., a dynamic decision making problem under risk? Standard economic rationality requires you to look at the final choices, determine the preferred options, choose the sequence of decisions that lead to those and follow that sequence through to the end. That behaviour is implied by the conjunction of the principles of separability, dynamic consistency and reduction of compound lotteries. Experimental research on these dynamic choice principles has been developed within the common ratio effect theoretical framework. This paper experimentally investigates what subjects do when confronting such a problem within a new theoretical framework provided by the common consequence effect that manipulates the value of the foregone-consequence in the prior risks.Results suggest that reduction of compound lotteries holds throughout, whilst dynamic consistency and separability do not and theirfailure is related to the foregone-consequence.

Suggested Citation

  • Maria J. Ruiz Martos, 2017. "Individual Dynamic Choice Behaviour and the Common Consequence Effect," ThE Papers 17/01, Department of Economic Theory and Economic History of the University of Granada..
    • Handle: RePEc:gra:wpaper:17/01
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    File URL: http://www.ugr.es/~teoriahe/RePEc/gra/wpaper/thepapers17_01.pdf
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    More about this item

    Keywords

    reduction of compound lotteries; dynamic consistency; separability; non-expected utility and risk;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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