How Common Is the Common-Ratio Effect?

24 Pages Posted: 28 Jul 2020 Last revised: 13 Oct 2021

See all articles by P Blavatskyy

P 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: October 10, 2021

Abstract

The common-ratio effect and the Allais paradox are the two best‐known violations of expected utility theory. We reexamine data from 38 experimental articles (127 designs/ parameterizations, 12717 revealed choice patterns) and find that the common-ratio effect is systematically affected by experimental design and implementation choices. The common-ratio effect is more likely to be observed in experiments with a low common-ratio factor, a high ratio of the middle to the highest outcome, when lotteries are presented as simple probability distributions (not in a compound/frequency form), and with real incentives. This latter result is not significant with cluster-robust standard errors.

Keywords: Decision Under Risk, Experimental Practices, Common Ratio Effect, Expected Utility Theory, Fanning-out

JEL Classification: D01, D81

Suggested Citation

Blavatskyy, P and Ortmann, Andreas and Panchenko, Valentyn, How Common Is the Common-Ratio Effect? (October 10, 2021). Available at SSRN: https://ssrn.com/abstract=3641566 or http://dx.doi.org/10.2139/ssrn.3641566

P Blavatskyy

Montpellier Business School ( email )

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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