Robust Testing Of the Allais Paradox By Paired Choices vs. Paired Valuations
Federico Echenique, Gerelt Tserenjigmid
TLDR
This paper challenges claims that the common ratio effect is absent, demonstrating valuation tests are biased and proposing a robust paired choice test.
Key contributions
- Challenges claims that valuation tests debunk the common ratio effect, showing they are inherently biased.
- Introduces a "strong" paired choice test, proven robustly unbiased across stochastic choice models.
- Applies the new test to existing data, confirming the common ratio effect remains highly prevalent.
Why it matters
This paper re-evaluates a recent claim that the common ratio effect, a key aspect of the Allais Paradox, is not systematically present. By demonstrating the flaws in valuation tests and proposing a robust alternative, it reinforces the prevalence of this important behavioral phenomenon, impacting economic theory.
Original Abstract
McGranaghan, Nielsen, O'Donoghue, Somerville, and Sprenger [2024] argue that standard paired choice tests for the common ratio effect are structurally biased when choice is stochastic, proposing valuation tests as a robust alternative. Using valuation tests, they find no systematic evidence for the common ratio effect, seemingly overturning much of the extant literature. We evaluate this conclusion in light of stochastic choice theory. We demonstrate that valuation tests are inherently biased and lack predictive power under standard expected utility assumptions. In contrast, we advocate for a ``strong'' paired choice test, proving it remains robustly unbiased across standard models of stochastic choice. Applying this strong test to existing experimental data, we find that the common ratio effect remains highly prevalent.
📬 Weekly AI Paper Digest
Get the top 10 AI/ML arXiv papers from the week — summarized, scored, and delivered to your inbox every Monday.