When Allais meets Ulysses: Dynamic axioms and the common ratio effect
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We report experimental findings about subjects’ behavior in dynamic decision problems involving multistage lotteries with different timings of resolution of uncertainty. Our within-subject design allows us to study violations of the independence and dynamic axioms: Dynamic Consistency, Consequentialism and Reduction of Compound Lotteries. We investigate the effects of changes in probability and outcome levels on the pattern of choices observed in the Common Ratio Effect (CRE) and in the Reverse Common Ratio Effect (RCRE) and on their dynamic counterparts. We find that the probability level plays an important role in violations of Reduction of Compound Lottery and Dynamic Consistency and the outcomes levels in violations of Consequentialism. Moreover, more than one quarter of our subjects satisfy the Independence axiom but violate two dynamic axioms. We thus suggest that there is a greater dissociation that might have been expected between preferences captured by dynamic axioms and those observed over single-stage lotteries.
KeywordsDecision theory Experiment Independence axiom Dynamic consistency Consequentialism
JEL ClassificationsC91 D81
This research was funded by CNRS, ANR Risk Attitude and University of Montpellier. We are grateful to Mohammed Abdellaoui, Thomas Epper, Brian Hill, John Hey, Chris Starmer, Peter Wakker and Marc Willinger, to participants in conferences in Lyon, Dijon, Barcelona and Montpellier and in seminars in Queensland University of Technology and Monash University for helpful comments. We also thank the editor and an anonymous referee for their constructive comments on earlier drafts of this paper and the managing editor, Christina Stoddard, for her great help through the entire publication process.
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