IDEAS home Printed from https://ideas.repec.org/p/kud/kuieci/1998-18.html
   My bibliography  Save this paper

Testing the Intransitivity Explanation of the Allais Paradox

Author

Listed:
  • Ebbe Groes

    (Institute of Economics, University of Copenhagen)

  • Hans Jørgen Jacobsen

    (Institute of Economics, University of Copenhagen)

  • Birgitte Sloth

    (Institute of Economics, University of Copenhagen)

  • Torben Tranæs

    (Institute of Economics, University of Copenhagen)

Abstract

This paper uses a two-dimensional version of a standard common consequence experiment to test the intransitivity explanation of Allais-paradox-type violations of expected utility theory. We compare the common consequence effect of two choice problems differing only with respect to whether alternatives are statistically correlated or independent. We framed the experiment so that intransitive preferences could explain violating behavior when alternatives are independent, but not when they are correlated. We found the same pattern of violation in the two cases. This is evidence against intransitivity as an explanation of the Allais Paradox. The question whether violations of expected utility are mainly due to intransitivity or to violation of independence is important since it is exactly on this issue the main new decision theories differ.

Suggested Citation

  • Ebbe Groes & Hans Jørgen Jacobsen & Birgitte Sloth & Torben Tranæs, 1997. "Testing the Intransitivity Explanation of the Allais Paradox," CIE Discussion Papers 1998-18, University of Copenhagen. Department of Economics. Centre for Industrial Economics, revised Oct 1998.
    • Handle: RePEc:kud:kuieci:1998-18
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fishburn, Peter C., 1989. "Non-transitive measurable utility for decision under uncertainty," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 187-207, April.
    2. Vind, Karl, 1991. "Independent preferences," Journal of Mathematical Economics, Elsevier, vol. 20(1), pages 119-135.
    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. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-824, December.
    5. Starmer, Chris & Sugden, Robert, 1991. "Does the Random-Lottery Incentive System Elicit True Preferences? An Experimental Investigation," American Economic Review, American Economic Association, vol. 81(4), pages 971-978, September.
    6. Conlisk, John, 1989. "Three Variants on the Allais Example," American Economic Review, American Economic Association, vol. 79(3), pages 392-407, June.
    7. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    8. Wakker, Peter, 1989. "Continuous subjective expected utility with non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 18(1), pages 1-27, February.
    9. Fishburn, Peter C., 1983. "Transitive measurable utility," Journal of Economic Theory, Elsevier, vol. 31(2), pages 293-317, December.
    10. 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..
    11. Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 16(1), pages 65-88, February.
    12. Chris Starmer, 1992. "Testing New Theories of Choice under Uncertainty using the Common Consequence Effect," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(4), pages 813-830.
    13. Sugden Robert, 1993. "An Axiomatic Foundation for Regret Theory," Journal of Economic Theory, Elsevier, vol. 60(1), pages 159-180, June.
    14. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    15. 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.
    16. 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. Han Bleichrodt & Ulrich Schmidt, 2002. "A Context-Dependent Model of the Gambling Effect," Management Science, INFORMS, vol. 48(6), pages 802-812, June.

    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. 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.
    2. Trabelsi, Mohamed Ali, 2006. "Les nouveaux modèles de décision dans le risque et l’incertain : quel apport ? [The new models of decision under risk or uncertainty : What approach?]," MPRA Paper 25442, University Library of Munich, Germany.
    3. Trabelsi, Mohamed Ali, 2006. "Les nouveaux modèles de décision dans le risque et l’incertain : quel apport ? [The new models of decision under risk or uncertainty : What approach?]," MPRA Paper 25442, University Library of Munich, Germany.
    4. Simone Cerreia‐Vioglio & David Dillenberger & Pietro Ortoleva, 2015. "Cautious Expected Utility and the Certainty Effect," Econometrica, Econometric Society, vol. 83, pages 693-728, March.
    5. Ulrich Schmidt & Horst Zank, 2012. "A genuine foundation for prospect theory," Journal of Risk and Uncertainty, Springer, vol. 45(2), pages 97-113, October.
    6. Amit Kothiyal & Vitalie Spinu & Peter Wakker, 2014. "An experimental test of prospect theory for predicting choice under ambiguity," Journal of Risk and Uncertainty, Springer, vol. 48(1), pages 1-17, February.
    7. 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.
    8. Humphrey, Steven J., 2000. "The common consequence effect: testing a unified explanation of recent mixed evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 41(3), pages 239-262, March.
    9. Florian H. Schneider & Martin Schonger, 2019. "An Experimental Test of the Anscombe–Aumann Monotonicity Axiom," Management Science, INFORMS, vol. 65(4), pages 1667-1677, April.
    10. 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.
    11. 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.
    12. Shaw, W. Douglass & Woodward, Richard T., 2008. "Why environmental and resource economists should care about non-expected utility models," Resource and Energy Economics, Elsevier, vol. 30(1), pages 66-89, January.
    13. Liang Zou, 2006. "An Alternative to Prospect Theory," Annals of Economics and Finance, Society for AEF, vol. 7(1), pages 1-28, May.
    14. repec:cup:judgdm:v:2:y:2007:i::p:115-125 is not listed on IDEAS
    15. Bernasconi, Michele, 1992. "Different Frames for the Independence Axiom: An Experimental Investigation in Individual Decision Making under Risk," Journal of Risk and Uncertainty, Springer, vol. 5(2), pages 159-174, May.
    16. Peter Brooks & Simon Peters & Horst Zank, 2014. "Risk behavior for gain, loss, and mixed prospects," Theory and Decision, Springer, vol. 77(2), pages 153-182, August.
    17. Olivier L’Haridon & Lætitia Placido, 2010. "Betting on Machina’s reflection example: an experiment on ambiguity," Theory and Decision, Springer, vol. 69(3), pages 375-393, September.
    18. 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.
    19. Bruno S. Frey, "undated". "Knight Fever towards an Economics of Awards," IEW - Working Papers 239, Institute for Empirical Research in Economics - University of Zurich.
    20. Pavlo R. Blavatskyy, "undated". "A Stochastic Expected Utility Theory," IEW - Working Papers 231, Institute for Empirical Research in Economics - University of Zurich.
    21. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.

    More about this item

    Keywords

    Allais paradox; common consequence experiment; sure-thing principle; intransitive preferences;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

    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:kud:kuieci:1998-18. 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: Thomas Hoffmann (email available below). General contact details of provider: https://edirc.repec.org/data/ciekudk.html .

    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.