Reduction of Compound Lotteries with Objective Probabilities: Theory and Evidence

Glenn Harrison, Jimmy Martínez-Correa and J. Swarthout
Authors registered in the RePEc Author Service: Jimmy Martínez-Correa ()

No 2012-04, Experimental Economics Center Working Paper Series from Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University

Abstract: The reduction of compound lotteries (ROCL) has assumed a central role in the evaluation of behavior towards risk and uncertainty. We present experimental evidence on its validity in the domain of objective probabilities. Our experiment explicitly recognizes the impact that the random lottery incentive mechanism payment procedure may have on preferences, and so we collect data using both "1-in-1" and "1-in-K" payment procedures, where K>1. We do not find violations of ROCL when subjects are presented with only one choice that is played for money. However, when individuals are presented with many choices and random lottery incentive mechanism is used to select one choice for payoff, we do find violations of ROCL. These results are supported by both non-parametric analysis of choice patterns, as well as structural estimation of latent preferences. We find evidence that the model that best describes behavior when subjects make only one choice is the Rank-Dependent Utility model. When subjects face many choices, their behavior is better characterized by our source-dependent version of the Rank-Dependent Utility model which can account for violations of ROCL. We conclude that payment protocols can create distortions in experimental tests of basic axioms of decision theory.

Pages: 100
Date: 2012-03, Revised 2015-07
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (42)

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http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2012-04.pdf First version, 2012 (application/pdf)
http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2015-04.pdf Revised version, 2015 (application/pdf)

Related works:
Journal Article: Reduction of compound lotteries with objective probabilities: Theory and evidence (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:exc:wpaper:2012-04

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