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A Systematic Test of the Independence Axiom Near Certainty

Author

Listed:
  • Ritesh Jain
  • Kirby Nielsen

Abstract

large literature has documented violations of expected utility consistent with a preference for certainty (the “certainty effect”), but recent studies question the prominence of this phenomenon. We design an experiment using lotteries spanning over the entire probability simplex to establish the prevalence of the certainty effect relative to its opposite. We find that violations of independence consistent with the reverse certainty effect are much more common than violations consistent with the certainty effect. Results hold as we test robustness along three dimensions: varying the mixing lottery, moving slightly away from certainty, and having a zero outcome.

Suggested Citation

  • Ritesh Jain & Kirby Nielsen, 2024. "A Systematic Test of the Independence Axiom Near Certainty," Working Papers 202402, University of Liverpool, Department of Economics.
    • Handle: RePEc:liv:livedp:202402
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    File URL: https://www.liverpool.ac.uk/media/livacuk/schoolofmanagement/departmentofeconomics/workingpapers/ECON,WP,202402.pdf
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    More about this item

    Keywords

    independence axiom; expected utility theory; certainty effect; Allais Paradox; common ratio effect;
    All these keywords.

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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