An Empirical Test of Ordinal Independence

George Wu

Journal of Risk and Uncertainty, 1994, vol. 9, issue 1, 39-60

Abstract: In this article, we test Green and Jullien's (1988) Ordinal Independence (OI) Axiom, an axiom necessary for any rank-dependent expected utility (RDEU) model, including Cumulative Prospect Theory (Tversky and Kahneman, 1992). We observe systematic violations of OI (some within-subject violation rates of over 50 percent). These patterns of choice cannot be explained by an RDEU theory alone. We suggest that subjects are employing an editing operation prior to evaluation: if an outcome-probability pair is common to both gambles, it is cancelled when the commonality is transparent; otherwise, it is not cancelled. We interpret the results with respect to both original and cumulative prospect theory and the known empirical properties of the weighting function. Copyright 1994 by Kluwer Academic Publishers

Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jrisku:v:9:y:1994:i:1:p:39-60

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