Negative Recency, Randomization Device Choice, and Reduction of Compound Lotteries
Lancaster University - Department of Economics
Eike B. Kroll
Otto-von-Guericke University Magdeburg
November 29, 2011
Economics Letters, May 2012, Vol. 115, No. 2, pp. 263-–267.
We report an experiment in which subjects are not indifferent between real-money lotteries implemented with randomization devices that are equivalent under the Reduction Axiom. Instead choice behavior is consistent with subjective distortion of conditional probability, and this persists in treatment conditions that control for (i) computational limitations and (ii) possible confounding by ratio bias.
Number of Pages in PDF File: 10
Keywords: reduction of compound lotteries, negative recency effect, gambler's fallacy, law of small numbers, randomization devices, instruments and materials, design of experiments, St. Petersburg paradox
JEL Classification: D81, C91Accepted Paper Series
Date posted: April 17, 2011 ; Last revised: July 26, 2012
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