Causes of Allais common consequence paradoxes: an experimental dissection

OO F Abstract The common consequence paradox of Allais can be decomposed into three simpler principles: transitivity, coalescing, and restricted branch independence. Different theories attribute such paradoxes to violations of restricted branch independence only, to coalescing only, or to both. This study separates tests of these two properties in order to compare these theories. Although rankdependent utility (RDU) theories, including cumulative prospect theory (CPT), violate branch independence, the empirical pattern of violations is opposite that required by RDU theories to account for Allais paradoxes. Data also show systematic violations of coalescing, which refute RDU theories. The findings contradict both original and CPTs with or without their editing principles of combination and cancellation. Modal choices were well predicted by Birnbaum’s RAM and TAX models with parameters estimated from previous data. The effects of event framing on these tests were also assessed and found to be negligible. r 2004 Published by Elsevier Inc.