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Now you see it, now you don’t: How to make the Allais Paradox appear, disappear, or reverse

Pavlo Blavatskyy (), Andreas Ortmann () and Valentyn Panchenko
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Pavlo Blavatskyy: School of Management and Governance, Murdoch University

No 2015-14, Discussion Papers from School of Economics, The University of New South Wales

Abstract: The Allais Paradox, or Common Consequence Effect to be precise, is one of the most wellknown behavioral regularities in individual decision making under risk. A common perception in the literature, which motivated the development of numerous generalized non‐expected utility theories, is that the Allais Paradox is a robust empirical finding. We argue that such a perception does not accurately reflect the experimental evidence on the Allais Paradox and show how specific choices of parameters can make it appear, disappear, or reverse. For example, our results suggest that the Allais Paradox is likely to disappear when lotteries involve relatively small outcomes under real financial incentives and probability distributions are described as compound lotteries or in a frequency format (rather than as reduced‐form simple lotteries). We also find that the Allais Paradox is likely to get reversed when lotteries are designed with an even division of the probability mass between the lowest and the highest outcomes.

Keywords: Decision under risk; the Allais Paradox; Common Consequence Effect; Expected Utility; Fanning-out; Experimental Practices (search for similar items in EconPapers)
JEL-codes: D01 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
Date: 2015-07
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