Template-Type: ReDIF-Paper 1.0
Author-Name: Kim Kaivanto
Author-Name-First: Kim
Author-Name-Last: Kaivanto
Author-Name: Eike Kroll
Author-Name-First: Eike
Author-Name-Last: Kroll
Title: Alternation bias and reduction in St. Petersburg gambles
Abstract: Reduction of compound lotteries is implicit both in the statement of the St. Petersburg Paradox and in its resolution by Expected Utility (EU).We report three real-money choice experiments between truncated compound-form St. Petersburg gambles and their reduced-form equivalents. The first tests for differences in elicited Certainty Equivalents. The second develops the distinction between ‘weak-form’ and ‘strong-form’ rejection of Reduction, as well as a novel experimental task that verifiably implements Vernon Smith’s dominance precept. The third experiment checks for robustness against range and increment manipulation. In all three experiments the null hypothesis of Reduction is rejected, with systematic deprecation of the compound form in favor of the reduced form. This is consistent with the predictions of alternation bias. Together these experiments offer evidence that the Reduction assumption may have limited descriptive validity in modelling St. Petersburg gambles, whether by EU or non-EU theories.
Creation-Date: 2014
File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/AlternationBias.pdf
File-Format: application/pdf
Number: 65600286
Classification-JEL: D81, C91
Keywords: St. Petersburg Paradox, reduction axiom, alternation bias, dominance precept, law of small numbers, test of indifference
Handle: RePEc:lan:wpaper:65600286