Connecting Common Ratio and Common Consequence Preferences
Charles Sprenger (Caltech)
Paper joint with Christina McGanaghan, Kirby Lielsen, Ted O'Donoghue, and Jason Somerville
Abstract:
Common ratio and common consequence effects are two foundational deviations from expected utility (EU). Most non-EU models treat them as global preference features, yet there has been little experimental exploration of parameters. Moreover, the two effects are typically analyzed independently despite their natural link through mixture attitudes. We empirically characterize combinations of preferences across the parameter space, documenting new regularities that are inconsistent with leading non-EU models. Finding no prominent model that can explain these regularities, we propose a model of “upside potential” motivated by our results.