Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/98412
Authors: 
Schmidt, Ulrich
Seidl, Christian
Year of Publication: 
2014
Series/Report no.: 
Kiel Working Paper 1930
Abstract: 
Common ratio effects should be ruled out if subjects' preferences satisfy compound independence, reduction of compound lotteries, and coalescing. In other words, at least one of these axioms should be violated in order to generate a common ratio effect. Relying on a simple experiment, we investigate which failure of these axioms is concomitant with the empirical observation of common ratio effects.We observe that compound independence and reduction of compound lotteries hold, whereas coalescing is systematically violated. This result provides support for theories which explain the common ratio effect by violations of coalescing (i.e., configural weight theory) instead of violations of compound independence (i.e., rank-dependent utility or cumulative prospect theory).
Subjects: 
common ratio effect
coalescing
reduction
compound independence
event splitting
branch splitting
isolation effect
Allais paradox
JEL: 
C91
C44
D81
Document Type: 
Working Paper

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