Testing independence conditions in the presence of errors and splitting effects
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This paper presents experimental tests of several independence conditions implied by expected utility and alternative models. We perform repeated choice experiments and fit an error model that allows us to discriminate between true violations of independence and those that can be attributed to errors. In order to investigate the role of event splitting effects, we present each choice problem not only in coalesced form (as in many previous studies) but also in split forms. It turns out previously reported violations of independence and splitting effects remain significant even when controlling for errors. However, splitting effects have a substantial influence on tests of independence conditions. When choices are presented in canonical split form, in which probabilities on corresponding probability-consequence ranked branches are equal, violations of the properties tested could be reduced to insignificance or even reversed.
KeywordsCoalescing Errors Expected utility Independence axiom Prospect theory Risky decision making Splitting effects
JEL ClassificationsC91 D81
We thank Glenn W. Harrison, James C. Cox, Graham Loomes, Peter P. Wakker, Stefan Trautmann, and seminar participants in Tilburg, Orlando, Atlanta, Exeter, Barcelona, Utrecht, and Rotterdam for helpful comments. Thanks are due to Jeffrey P. Bahra for assistance in data collection for Experiment 2.
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