Experimental Economics Seminar - Elif Incekara-Hafalir (University of Technology Sydney)
Room 315, Level 3, FBE Building, 111 Barry Street, Carlton
MapTitle: The Allais paradox resolved: not wanting to leave empty-handed
Abstract: This article provides a novel explanation for the Allais paradox. Specifically, we demonstrate that aversion to receiving nothing---a phenomenon we call the zero effect---explains all systematic violations of expected utility found in the Allais paradox. By contrast, our experiments find no evidence of a ``certainty effect,'' that is, of riskless choices having added appeal over non-degenerate lotteries. In choices without a possible zero effect, the Allais paradox vanishes or is greatly diminished. In sum, the zero effect is a parsimonious and compelling explanation for the Allais paradox.