Ever since Allais

Abstract

The Allais critique of expected utility theory (EUT) has led to the development of theories of choice under risk that relax the independence axiom, but which adhere to the conventional axioms of ordering and monotonicity. Unlike many existing laboratory experiments designed to test independence, our experiment systematically tests the entire set of axioms, providing much richer evidence against which EUT can be judged. Our within-subjects analysis is nonparametric, using only information about revealed preference relations in the individual-level data. For most subjects we find that departures from independence are statistically significant but minor relative to departures from ordering and/or monotonicity.

Rationalizability, cost-rationalizability, and Afriat’s efficiency index

“…The approach could also be applied straightforwardly to many prominent models of decision making under uncertainty and over time, which are formally very similar to models of decision making under risk (seePolisson, Quah, and Renou (2020)). 7 See, for just a few examples,Harbaugh, Krause, and Berry (2001),Andreoni and Miller (2002),Choi et al (2007Choi et al ( , 2014,Fisman, Kariv, and Markovits (2007), andCarvalho, Meier, and Wang (2016).8 TheAfriat (1973) index can be calculated efficiently using a binary search algorithm for a wide class of utility models (seePolisson, Quah, and Renou (2020) andDembo et al (2024)), whereas theVarian (1990) andHoutman and Maks (1985) indices are known to be more computationally demanding, and especially when U is not simply U W B .…”