Does size matter? The Allais paradox and preference reversals with varying outcome magnitudes

Adam Oliver and Cass Sunstein

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The common consequence effect and preference reversals are two of the foundational violations of the standard model of rational choice (i.e. von Neumann – Morgenstern expected utility theory) and, as such, played an important role in the development of empirical behavioural economics. One can hypothesise, however, that due to varying degrees of risk aversion when faced with outcomes of different magnitude, the rate of both of these violations may vary with outcome size. Using various types of outcome, this article reports tests of these violations using different outcome magnitudes in within-respondent designs. The results observed are broadly consistent across outcome type: the common consequence effect, while rarely being substantially observed in any of the tests undertaken, was often found to be somewhat susceptible to outcome size while preference reversals, which were everywhere substantially observed, were not. In and of itself, the observation of systematic preference reversals implies that preferences are often constructed according to the way in which questions are asked, and is sufficient to question the usefulness of stated preference techniques for informing public policy.

Keywords: Allais paradox; common consequence effect; expected utility theory; outcome size; preference elicitation; preference reversals; rational choice (search for similar items in EconPapers)
JEL-codes: J1 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2019-02-01
New Economics Papers: this item is included in nep-evo and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Behavioral and Experimental Economics, 1, February, 2019, 78, pp. 45-60. ISSN: 2214-8043

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:91130

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