A simple test of expected utility theory using professional traders.

We compare behavior across students and professional traders from the Chicago Board of Trade in a classic Allais paradox experiment. Our experiment tests whether independence, a necessary condition in expected utility theory, is systematically violated. We find that both students and professionals exhibit some behavior consistent with the Allais paradox, but the data pattern does suggest that the trader population falls prey to the Allais paradox less frequently than the student population.

[1]  J. Neumann,et al.  Theory of games and economic behavior , 1945, 100 Years of Math Milestones.

[2]  D. Bernoulli.  Exposition of a New Theory on the Measurement of Risk , 1954 .

[3]  W. R. Buckland,et al.  Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability. , 1952 .

[4]  C. Starmer,et al.  Testing New Theories of Choice under Uncertainty using the Common Consequence Effect , 1992 .

[5]  J. Baron.  Thinking and Deciding , 2023 .

[6]  R. Sugden,et al.  Does the Random-Lottery Incentive System Elicit True Preferences? An Experimental Investigation , 2016 .

[7]  L. Beach,et al.  The citation bias: Fad and fashion in the judgment and decision literature. , 1984 .

[8]  V. Smith,et al.  Research in Experimental Economics , 1979 .

[9]  A. Tversky,et al.  The framing of decisions and the psychology of choice. , 1981, Science.

[10]  Charles A. Holt,et al.  Preference Reversals and the Independence Axiom , 1986 .

[11]  P. Schoemaker.  The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations , 1982 .

[12]  J. List.  Does market experience eliminate market anomalies , 2003 .

[13]  Mark Perlman,et al.  The Rational Foundations of Economic Behaviour , 1996 .

[14]  Shane Moriarity.  Laboratory market research , 1986 .

[15]  John A. List,et al.  Preference Reversals of a Different Kind: The "More Is Less" Phenomenon , 2002 .

[16]  M. Machina.  "Expected Utility" Analysis without the Independence Axiom , 1982 .

[17]  John A List,et al.  Testing neoclassical competitive market theory in the field , 2002, Proceedings of the National Academy of Sciences of the United States of America.

[18]  M. Allais.  Le comportement de l'homme rationnel devant le risque : critique des postulats et axiomes de l'ecole americaine , 1953 .

[19]  M. Yaari.  The Dual Theory of Choice under Risk , 1987 .