Data Management

Reverse Common Ratio Effect

Date Added: Feb 2010
Format: PDF

The results of a new experimental study reveal highly systematic violations of expected utility theory. The pattern of these violations is exactly the opposite of the classical common ratio effect discovered by Allais (1953). Two recent decision theories - stochastic expected utility theory (Blavatskyy, 2007) and perceived relative argument model (Loomes, 2008) - predicted the existence of a reverse common ratio effect. However, these theories can rationalize only one part of the new experimental data reported in this paper. The other part appears to be neither predicted by existing theories nor documented in the existing empirical studies.