Now You See It, Now You Don’t: How to Make the Allais Paradox Appear, Disappear, or Reverse

25 Pages Posted: 6 Jul 2015

See all articles by Pavlo R. Blavatskyy

Pavlo R. Blavatskyy

Montpellier Business School

Andreas Ortmann

UNSW Australia Business School, School of Economics

Valentyn Panchenko

UNSW Business School, Economics, University of New South Wales

Date Written: June 23, 2015

Abstract

The Allais Paradox, or Common Consequence Effect to be precise, is one of the most well-known 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

JEL Classification: D01, D81

Suggested Citation

Blavatskyy, Pavlo R. and Ortmann, Andreas and Panchenko, Valentyn, Now You See It, Now You Don’t: How to Make the Allais Paradox Appear, Disappear, or Reverse (June 23, 2015). UNSW Business School Research Paper No. 2015-14, Available at SSRN: https://ssrn.com/abstract=2621917 or http://dx.doi.org/10.2139/ssrn.2621917

Pavlo R. Blavatskyy

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Andreas Ortmann (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Valentyn Panchenko

UNSW Business School, Economics, University of New South Wales ( email )

Sydney, NSW 2052
Australia

HOME PAGE: http://research.economics.unsw.edu.au/vpanchenko

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