The effects of payout and probability magnitude on the Allais paradox

Abstract

The Allais paradox decision bias was first offered as a challenge to the expected utility theory over 60 years ago. Although the Allais paradox is a standard challenge for normative theories of risky choice, its causes are not well understood. The present experiment uses two manipulations of the Allais paradox to investigate the commonly proposed probability-weighting explanation of the paradox. Reducing the magnitude of the outcomes did not affect the size of the Allais paradox, contradicting previous literature and supporting the probability weighting hypothesis. Reducing the probability of the nonzero outcomes to eliminate certainty reduced, but did not eliminate, the Allais paradox, a result inconsistent with probability weighting and other theories of the Allais paradox. The results suggest that the certainty effect alone cannot explain the Allais paradox.