We report experimental ﬁndings about subjects’ behavior in dynamic decision problems involving multistage lotteries with different timings of resolution of uncertainty. Our with in subject design allows us to study violations of the Independence axiom and of the dynamic axioms: Dynamic Consistency, Consequentialism and Reduction of Compound Lotteries. More precisely we investigate the extensions in a dynamic framework of the pattern of choices observed in the Common Ratio Effect (CRE). We study the effects of changes in probability and outcomes over CRE-like violations of each dynamic axiom as well as the eventual association between the independence axiom and each dynamic axiom. We ﬁnd that, although probability and outcomes do not have an impact on general violation levels of the dynamic axioms, each of these parameter dimensions play an important role when it comes to CRE-like violations of the axioms: the probability level for Reduction of Compound Lottery and Dynamic Consistency and the outcomes levels for Consequentialism. Moreover, we ﬁnd that an important proportion of our subjects verify the Independence axiom but violate some dynamic axiomsin a systematicmanner. This accounts for the fact that dynamic axioms are not only extensions of the Independence axiom to a dynamic framework but also capture preferences that are independent of those observed with single stage lotteries.
When Allais meets Ulysses: dynamic consistency and the certainty effect
14 January 2014