How Common Is the Common-Ratio Effect?
24 Pages Posted: 28 Jul 2020 Last revised: 13 Oct 2021
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: Suggested Citation