Distinguishing Common Ratio Preferences from Common Ratio Effects Using Paired Valuation Tasks
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1.
University of Delaware
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2.
California Institute of Technology
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3.
Cornell University
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4.
Federal Reserve Bank of New York
Abstract
Without strong assumptions about how noise manifests in choices, we can infer little from existing empirical observations of the common ratio effect (CRE) about whether there exists an underlying common ratio preference (CRP). We propose to solve this inferential challenge using paired valuations, which yield valid inference under common assumptions. Using this approach in an online experiment with 900 participants, we find no evidence of a systematic CRP. To reconcile our findings with existing evidence, we present the same participants with paired choice tasks and demonstrate how noise can generate a CRE even for individuals without an associated CRP. (JEL C91, D81, D91)
Acknowledgement
For helpful comments and suggestions, we thank Ori Heffetz and Alex Rees-Jones, and seminar participants at the University of Michigan, Brown University, Loyola Marymount University, Claremont Graduate University, the University of California at Berkeley, MidExLab, briq, New York University, the University of California at Santa Cruz, Purdue University, University of Chicago, Penn State University, the 2022 Behavioral Economics Annual Meeting, the 2022 Stanford Institute for Theoretical Economics Conference, and the 2023 East Coast Behavioral and Experimental Workshop. The views expressed in this paper are those of the authors alone and do not necessarily reflect the views Federal Reserve Bank of New York or the Federal Reserve System. The experiment reported in this paper was preregistered on the AEA RCT Registry (McGranaghan et al. 2021). The experiment was reviewed and granted an exemption by the Institutional Review Board at the California Institute of Technology under protocol number 21-1073.
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Additional details
- Publication Status
- Published