The Becker-DeGroot-Marschak mechanism and generalized utility theories: Theoretical predictions and empirical observations

Abstract

Karni and Safra [8] prove that the Becker-DeGroot-Marschak mechanism reveals a decision maker's true certainty equivalent of a lottery if and only if he satisfies the independence axiom. Segal [17] claims that this mechanism may reveal a violation of the reduction of compound lotteries axiom. This paper empirically tests these two interpretations. Our results show that the second interpretation fits better with the collected data. Moreover, we show by means of some nonexpected utility examples that these results are consistent with a wide range of functionals.