Kiel Working Papers, Kiel Institute for World Economics
No 1712:
Paradoxes and Mechanisms for Choice under Risk
James C. Cox, Vjollca Sadiraj and Ulrich Schmidt
Abstract: Experiments on choice under risk typically involve
multiple decisions by individual subjects. The choice of mechanism for
selecting decision(s) for payoff is an essential design feature that is
often driven by appeal to the isolation hypothesis or the independence
axiom. We report two experiments with 710 subjects. Experiment 1 provides
the first simple test of the isolation hypothesis. Experiment 2 is a
crossed design with six payoff mechanisms and five lottery pairs that can
elicit four paradoxes for the independence axiom and dual independence
axiom. The crossed design discriminates between: (a) behavioral deviations
from postulated properties of payoff mechanisms; and (b) behavioral
deviations from theoretical implications of alternative decision theories.
Experiment 2 provides tests of the isolation hypothesis and four paradoxes.
It also provides data for tests for portfolio effect, wealth effect,
reduction, adding up, and cross-task contamination. Data from Experiment 2
suggest that a new mechanism introduced herein may be less biased than
random selection of one decision for payoff
Keywords: isolation, mechanisms, paradoxes, independence, dual independence, cross-task contamination, portfolio effect, wealth effect, reduction, adding-up; (follow links to similar papers)
JEL-Codes: C91,; D81; (follow links to similar papers)
44 pages, June 2011
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