How Common Is the Common-Ratio Effect?

Abstract

The common-ratio effect and the Allais paradox are the two best‐known violations of expected utility theory. We reexamine data from 38 experimental articles (127 designs/ parameterizations, 12717 revealed choice patterns) and find that the common-ratio effect is systematically affected by experimental design and implementation choices. The common-ratio effect is more likely to be observed in experiments with a low common-ratio factor, a high ratio of the middle to the highest outcome, when lotteries are presented as simple probability distributions (not in a compound/frequency form), and with real incentives. This latter result is not significant with cluster-robust standard errors.