Abstract

The transitivity axiom is common to nearly all descriptive and normative utility theories of choice under risk. Recent experiments claim to show observed intransitive preference cycles are no more than noise. We take issue with this consensus position and its normative defence of transitivity. We draw upon the ‘Steinhaus-Trybula paradox’ as a recipe to bespoke design pairs of lotteries over which preferences might cycle. We run an experiment to look for cycles and transitivity’s implication of expansion/contraction consistency between binary and ternary choice sets. Even after considering possible stochastic but transitive explanations, we find cycles can be the modal preference pattern over these simple lotteries and also find systematic violations of expansion/contraction consistency. We conclude with a defence of these preferences, including a novel argument against the money pump.

Highlights

  • Researchers have questioned the adequacy of Expected Utility Theory (EUT) as an account of choice under risk since Allais (1953) presented his famous ’paradox’ examples

  • Bar-Hillel & Margalit (1988) quote Luce & Raiffa’s (1957) definition of transitivity as "if A is preferred in the paired comparison (A, B) and B is preferred in the paired comparison

  • While we focus in the rest of this paper on preferences over simple lotteries, we should not forget the relevance of these objects to real economic decisions for choice under risk

Read more

Summary

Introduction

Researchers have questioned the adequacy of Expected Utility Theory (EUT) as an account of choice under risk since Allais (1953) presented his famous ’paradox’ examples. Economists question one axiom of EUT less than most: transitivity. Bar-Hillel & Margalit (1988) quote Luce & Raiffa’s (1957) definition of transitivity as "if A is preferred in the paired comparison (A, B) and B is preferred in the paired comparison C), A is preferred in the paired comparison (A, C)" Notice that the binary comparison A, C is superfluous: a rational chooser can rely on transitivity to deliver the best option. Economists regard transitivity as a defining characteristic of rational choice

Objectives
Methods
Results
Conclusion
Full Text
Paper version not known

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call