Allais for all: Revisiting the paradox in a large representative sample

Steffen Huck,Wieland Müller

doi:10.1007/s11166-012-9142-8

Abstract

We administer the Allais paradox questions to both a representative sample of the Dutch population and to student subjects. Three treatments are implemented: one with the original high hypothetical payoffs, one with low hypothetical payoffs and a third with low real payoffs. Our key findings are: (i) violations in the non-lab sample are systematic and a large bulk of violations is likely to stem from non-familiarity with large payoffs, (ii) we can identify groups of the general population that have much higher than average violation rates; this concerns mainly the lowly educated and unemployed, and (iii) the relative treatment differences in the population at large are accurately predicted by the lab sample, but violation rates in all lab treatments are about 15 percentage points lower than in the corresponding non-lab treatments.

Highlights

This paper presents evidence on the consistency of risk preferences with expected utility theory in a representative population sample
Our results are useful for several practical issues: (1) Our results point to a number of conditions that make standard theoretical predictions more likely to hold, (2) Our results identify certain parts of the population that, due to inconsistencies, may have difficulties in making sound financial decisions, and (3) Our results contribute to a better understanding of what can be reliably learned from laboratory experiments
As in previous lab samples, the violations of EUT are systematic in the population at large and much lower when stakes are low

Summary

Introduction

This paper presents evidence on the consistency of risk preferences with expected utility theory in a representative population sample. From the perspective of these studies, the present paper takes one step back by focussing on consistency of risk preferences with expected utility theory in a representative subject pool— well over 1,400 members of the CentER Panel, a representative sample of the Dutch population. We do this by falling back on the oldest consistency test of all—the Allais paradox (Allais 1953). Our third treatment used the same downscaled payoffs but paid them out for real This enables us to examine to what extent violations are driven by lack of monetary incentives, on the one hand, and non-familiarity with large sums of money on the other. We can compare whether and how a lab study can tell us something about the population at large

Objectives

Methods

Conclusion