The Common Ratio Effect in Choice, Pricing, and Happiness Tasks

Mark Schneider and Mikhael Shor
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Mark Schneider: Chapman University
Authors registered in the RePEc Author Service: Mark Schneider and Mark Schneider

No 2016-29, Working papers from University of Connecticut, Department of Economics

Abstract: The Allais common ratio effect is one of the most robust violations of rational decision making under risk. In this paper, we conduct a novel test of the common ratio effect in which we elicit preferences for the common ratio choice alternatives in choice, pricing, and happiness rating tasks. We find that both the consistency and distribution of responses differs systematically across tasks, with modal choices replicating the Allais preference pattern, modal happiness ratings exhibiting consistent risk aversion, and modal prices maximizing expected value. We discuss the predictions of various cognitive explanations of the common ratio effect in the context of our experiment. We find that a dual process framework provides the most complete account of our results. Surprisingly, we also find that although the Allais pattern was the modal behavior in the choice task, none of the 158 respondents in our experiment exhibited the Allais pattern simultaneously in choice, happiness, and pricing tasks. Our results constitute a new paradox for the leading theories of choice under risk. JEL Classification: Key words: Common Ratio Effect; Preference Reversals; Dual Processes; Happiness Ratings

Pages: 30 pages
Date: 2016-05
New Economics Papers: this item is included in nep-exp and nep-hap
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