A Systematic Test of the Independence Axiom Near Certainty

Ritesh Jain and Kirby Nielsen

No 202402, Working Papers from University of Liverpool, Department of Economics

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.

Keywords: independence axiom; expected utility theory; certainty effect; Allais Paradox; common ratio effect (search for similar items in EconPapers)
JEL-codes: C79 D82 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2024-02
New Economics Papers: this item is included in nep-exp and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:liv:livedp:202402

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