A Systematic Test of the Independence Axiom Near Certainty

Ritesh Jain and Kirby Nielsen ()
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Kirby Nielsen: Department of Economics, Stanford University, https://economics.stanford.edu/

No 20-A001, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: A large literature has documented violations of expected utility consistent with a preference for certainty (the “certainty effect”). We design a laboratory experiment to investigate the role of the certainty effect in explaining violations of the independence axiom. We use lotteries spanning over the entire probability simplex to detect violations systematically. We find that violations of independence consistent with the reverse certainty effect are much more common than violations consistent with the certainty effect. Results hold as we test robustness along two dimensions: varying the mixing lottery and moving slightly away from certainty.

Keywords: : independence axiom; expected utility theory; certainty effect; Allais Paradox (search for similar items in EconPapers)
JEL-codes: C79 D82 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2020-06
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
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