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Testing independence conditions in the presence of errors and splitting effects

Michael H. Birnbaum (), Ulrich Schmidt and Miriam D. Schneider
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Michael H. Birnbaum: California State University (CSUF)
Miriam D. Schneider: University of Kiel

Journal of Risk and Uncertainty, 2017, vol. 54, issue 1, 61-85

Abstract: Abstract 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.

Keywords: Coalescing; Errors; Expected utility; Independence axiom; Prospect theory; Risky decision making; Splitting effects; C91; D81 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Testing independence conditions in the presence of errors and splitting effects (2010) Downloads
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