A “Pseudo-endowment” effect,and its implications for some recent nonexpected utility models

This article describes a modification of the Allais paradox that induces preferences inconsistent with two conditions weaker than the independence axiom, namely quasi-convexity (a special case of which is the betweenness axom), and Hypothesis II of Machina (also called fanning-out). These violations can be formally derived from prospect theory by invoking a nonliner transformation of probability into decision weight.I would like to thank David Bell, Vijay Krishna, John Pratt, and especially Colin Camerer for helpful comments and criticism.