Testing the Intransitivity Explanation of the Allais Paradox

This paper uses a two-dimensional version of a standard common consequence experiment to test the intransitivity explanation of Allais-paradox-type violations of expected utility theory. We compare the common consequence effect of two choice problems differing only with respect to whether alternatives are statistically correlated or independent. We framed the experiment so that intransitive preferences could explain violating behavior when alternatives are independent, but not when they are correlated. We found the same pattern of violation in the two cases. This is evidence against intransitivity as an explanation of the Allais Paradox. The question whether violations of expected utility are mainly due to intransitivity or to violation of independence is important since it is exactly on this issue the main new decision theories differ.     

The sure thing principle and the value of information

This paper examines the relationship between Savage's sure thing principle and the value of information. We present two classes of results. First, we show that, under a consequentialist axiom, the sure-thing principle is neither sufficient nor necessary for perfect information to be always desirable: specifically, under consequentialism, the sure thing principle is not implied by the condition that perfect information is always valuable; moreover, the joint imposition of the sure thing principle, consequentialism and either one of two state independence axioms does not imply that perfect information is always desirable. Second, we demonstrate that, under consequentialism, the sure thing principle is necessary for a nonnegative value of possibly imperfect information (though of course the principle is still not sufficient). One implication of these results is that the sure thing principle, under consequentialism, plays a somewhat different role in ensuring dynamic consistency in decision making under uncertainty than does the independence axiom in decision making under risk.     

Two simple characterizations of the Nash bargaining solution

We provide two alternative characterizations of the Nash bargaining solution. We introduce new simple axioms, strong undominatedness by the disagreement point, and egalitarian Pareto optimality. First, we prove that the Nash solution is characterized by symmetry, scale invariance, independence of irrelevant alternatives, and strong undominatedness by the disagreement point. Second, we replace the independence of irrelevant alternatives axiom with the sandwich axiom (Rachmilevitch in Theory Decis 80:427–442, 2016) and egalitarian Pareto optimality. We then demonstrate that the Nash solution is characterized by symmetry, scale invariance, strong undominatedness by the disagreement point, the sandwich axiom, and egalitarian Pareto optimality.     

Dynamic Choice, Independence and Emotions

From the viewpoint of the independence axiom of expected utility theory, an interesting empirical dynamic choice problem involves the presence of a “global risk,” that is, a chance of losing everything whichever safe or risky option is chosen. In this experimental study, participants have to allocate real money between a safe and a risky project. Treatment variable is the particular decision stage at which a global risk is resolved: (i) before the investment decision; (ii) after the investment decision, but before the resolution of the decision risk; (iii) after the resolution of the decision risk. The baseline treatment is without global risk. Our goal is to investigate the isolation effect and the principle of timing independence under the different timing options of the global risk. In addition, we examine the role played by anticipated and experienced emotions in the choice problem. Main findings are a violation of the isolation effect, and support for the principle of timing independence. Although behavior across the different global risk cases shows similarities, we observe clear differences in people’s affective responses. This may be responsible for the conflicting results observed in earlier experiments. Dependent on the timing of the global risk different combinations of anticipated and experienced emotions influence decision making.      

Testing the Effects of Similarity on Risky Choice: Implications for Violations of Expected Utility

Our aim in this paper was to establish an empirical evaluation for similarity effects modeled by Rubinstein; Azipurua et al.; Leland; and Sileo. These tests are conducted through a sensitivity analysis of two well-known examples of expected utility (EU) independence violations. We found that subjective similarity reported by respondents was explained very well by objective measures suggested in the similarity literature. The empirical results of this analysis also show that: (1) the likelihood of selection for the riskier choice increases as the pair becomes more similar, (2) these choice patterns are consistent with well-known independence violations of expected utility, and (3) a significant proportion of individuals exhibit intransitive choice patterns predicted under similarity effects, but not allowed under generalized expected utility models for risky choice.     

Empirical evidence of two-attribute utility dependence on probability

We investigate utility dependence on probability using a new methodology that examines how indifference statements vary with the probability of obtaining times and costs of individual trips. Of 127 subjects, 8 supplied 3 (out of 3) sets of indifference statements consistent with probability independence. Those subjects with 2 or more sets of indifference statements violating probability independence exhibited a systematic dependence, in that knowing the direction of a subject's violation in one set of indifference statements would increase the likelihood of his or her violating other sets of indifference statements in the same direction. Data show that this systematic violation of dependence should not be attributed to artifacts of the experiment.     

Central banks’ priorities and the left/right partisanship of exchange rates

This study argues that when central banks subordinate all policy goals to achieving price stability greater central bank independence encourages left-wing governments to seek greater exchange rate stability. Such central bank policy priorities make the Left's preferred distributive policies more dependent on the effectiveness of fiscal policy, which under high capital mobility increases with exchange rate stability. In contrast, right-wing governments put greater emphasis on market adjustments and price stability. Hypotheses are tested by estimating the sensitivity of exchange rate variation to partisanship, central bank independence, and the salience of price stability, using a Prais-Winsten estimator and Instrumented Variables, run on pooled cross-section time-series data from 22 OECD countries during 1990-2004.     

Framing,Switching and Preference Reversals

An explicitly frame related interpretation of a very general more for less result is used to establish a correspondingly general class of frame related switching results. These are used in turn to show how preference reversals of kinds found by Allais and others may not only be essentially non-paradoxical in character, but can be expected to be frequently observed, even under conditions of certainty and of complete information.     

Ordinal independence in nonlinear utility theory

Individual behavior under uncertainty is characterized using a new axiom, ordinal independence, which is a weakened form of the von Neumann-Morgenstern independence axiom It states that if two distributions share a tail in common, then this tail can be modified without altering the individual's preference between these distributions. Preference is determined by the tail on which the distributions differ. This axiom implies an appealing and simple functional form for a numerical representation of preferences. It generalizes the form of anticipated utility, and it explains some well-known forms of behavior, such as the Friedman-Savage paradox, that anticipated utility cannot.     

Economic policy implications of the Gibson Law in the Netherlands (1800–2012)

Gibson paradox is one of the most discussed economic phenomena in the literature. As observed by Keynes (1930), the most established empirical fact in economics remains unsolved. This paper investigates the Gibson law in the Netherlands over 1800–2012 focusing on the nature of the paradox. Establishing the presence of the paradox outside Gibson (1923) original research in the United Kingdom brings new light to understanding the paradox true nature. A non-linear analysis (logit) is used to identify the factors behind the paradox in the Netherlands. The results provide support that Gibson paradox is the most established empirical fact (non-linear and multivariate) in economics that has pronounced economic policy implications. Policy makers and central banks significantly affect short-term interest rates influencing long-term rates under the expected rise in interest rates for circulation credits. High purchasing power means better micro and macro liquidity and less demand for circulations credits directing Gibson regime-switching behaviour.     

Preference for Information and Dynamic Consistency

We provide necessary and sufficient conditions for a dynamically consistent agent always to prefer more informative signals (in single-agent problems). These conditions do not imply recursivity, reduction or independence. We provide a simple definition of dynamically consistent behavior, and we discuss whether an intrinsic information lover (say, an anxious person) is likely to be dynamically consistent.     

Equilibrium Bidding without the Independence Axiom: A Graphical Analysis

In this paper we examine optimal bidding without the independence axiom in a unified framework which allows for a clear graphical representation. Thus, we can show very simply the independence axiom to be a necessary and sufficient condition on preferences for strategical equivalence of the two first-price and second-price auctions, respectively, and for the second-price sealed-bid auction to be demand revealing. The analysis reveals that the betweenness property is necessary and sufficient for the ascending-bid auction to be demand revealing while optimal bids exceed (are less than) bidders' valuations, iff preferences are quasiconcave (quasiconvex). Furthermore, it can be shown that fanning out (fanning in) leads to a higher (lower) selling-price in open than in sealed-bid auctions.     

Reconsidering the common ratio effect: the roles of compound independence,reduction, and coalescing

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).     

Testing independence conditions in the presence of errors and splitting effects

This paper presents experimental tests of several independence conditions implied by expected utility and alternative models. We perform repeated choice experiments and fit an error model that allows us to discriminate between true violations of independence and those that can be attributed to errors. In order to investigate the role of event splitting effects, we present each choice problem not only in coalesced form (as in many previous studies) but also in split forms. It turns out previously reported violations of independence and splitting effects remain significant even when controlling for errors. However, splitting effects have a substantial influence on tests of independence conditions. When choices are presented in canonical split form, in which probabilities on corresponding probability-consequence ranked branches are equal, violations of the properties tested could be reduced to insignificance or even reversed.     

邓小平独立自主、自力更生和对外开放思想探析

邓小平对外开放理论是崭新的理论 ,既有鲜明的时代特性和理论个性 ,又与马列主义、毛泽东思想一脉相承 ,有着不可分离的血肉联系 ;独立自主、自力更生是对外开放的立足点 ,对外开放是独立自主、自力更生的题中之义 ;在独立自主、自力更生的基础上实行对外开放 ,是实现中国式现代化的必由之路 ;要坚持对外开放 ,就必须“两手抓” ,抑制种种负面效应 ,及时化解风险     

Ambiguity framed

In his exposition of subjective expected utility theory, Savage (1954) proposed that the Allais paradox could be reduced if it were recast into a format which made the appeal of the independence axiom of expected utility theory more transparent. Recent studies consistently find support for this prediction. We consider a salience-based choice model which explains this frame-dependence of the Allais paradox. We then derive the novel prediction that the presentation format responsible for reductions in Allais-style violations of expected utility theory will also reduce Ellsberg-style violations of subjective expected utility theory. This format makes the appeal of Savage’s “sure thing principle” more transparent. We design an experiment to test this prediction and find strong support for such frame-dependence of ambiguity aversion in Ellsberg-style choices. In particular, we observe markedly less ambiguity-averse behavior in Savage’s matrix format than in a more standard “prospect” format. This finding poses a new challenge for the leading models of ambiguity aversion.     

Separation of powers and the Ecuadorian Supreme Court: exploring presidential–judicial conflict in a post-transition democracy

In 2005 ongoing political conflict between the executive and legislative branches of government in Ecuador culminated in a struggle over the judiciary. These events resulted in the dismissal, re-constitution, and dismissal again of the Ecuadorian high court (the Corte Suprema de Justicia) and the impeachment of the president. This paper uses the political crisis surrounding the dismissal of the Ecuadorian Supreme Court of Justice to examine the broader phenomenon of executive branch attacks on the judiciary in South American and Africa. We make three general observations: (1) the longevity of the judiciary alone (time without attack) does not guarantee a sufficiently deep reservoir of diffuse support to protect it from successful efforts at structural change or dissolution, (2) despite previous evidence that multilateral constitutional processes result in increased court independence (Dargent, 2009), we conclude that multi-party institutional arrangements are more vulnerable to the types of crisis that cause them to seek to use courts and their legitimacy to achieve political goals thereby limiting previous gains in independence, and (3) a court's institutional legitimacy is enhanced when it survives political threats from other branches of government. The crisis in Ecuador is used to demonstrate the challenges facing newer democracies with continuing multilateral conflict as well as the utility of thinking about how, why and when political institutions attack high courts and how the judiciary and citizens respond.     

From cognitive dissonance to cognitive Polyphasia: A sociocultural approach to understanding meat‐paradox

Cognitive Dissonance Theory seeks to understand inconsistency by situating it within individual cognition. By doing so, it overlooks the role of the social context in the experience and management of inconsistency and dissonance and fails to capture the processes through which it is negotiated when it appears. On the other side, the cognitive polyphasia hypothesis together with a dialogical approach on Social Representations provide a socioculturally situated, process‐oriented understanding of inconsistency. In this paper, meat‐paradox, the phenomenon of simultaneously declaring love and respect towards animals and also consuming animals, mainly studied through Cognitive Dissonance Theory, is used in order to highlight the merits of a sociocultural approach to inconsistency. Four relevant empirical examples from interviews and focus groups with meat‐eaters and vegetarians in Cyprus are used to illustrate the approach. The examples illustrate how meat‐eaters manage dissonance in ways that exhibit coexistence of contradictory representations and ways of thinking. Three different modalities of knowledge coexistence are identified, as proposed by cognitive polyphasia researchers: displacement, selective prevalence and hybridisation. We discuss the importance of a sociocultural approach to studying paradoxes, the epistemological and methodological implications of such a theorisation and we suggest other life contexts in which such an approach can be applied.