4/8/2015

The Common Ratio Effect
C1 100% $8 vs 80% $10 $0 C2
Violations of Expected Utility: The 
20% 

Common Ratio and Common  D1 25% $8 75 % $0 vs 80% $0

$10 D2

Consequence Effects
ECON 1820 Spring 2015
Mark Dean • Many people choose C1 and D2

The Common Ratio Effect The Common Ratio Effect
100% $8 vs 80% $10 $0 C1 100% $8 vs 80% $10 $0 C2

25% $8 20% 
D1 75 % $0 vs $10 80% $0 D2

100 1

90 0.9

80 0.8

70 0.7

60 0.6

– Which would you choose? 50
40
0.5

0.4
30 0.3
20 0.2
10 0.1
0 0
C1 D1 C1 D1

2014 2015

The Common Ratio Effect The Common Ratio Effect
C1 100% $8 vs 80% $10 $0 C2

25% $8 20%  25% $8 20% 

75 % $0 vs $10 80% $0 D1 75 % $0 vs $10 80% $0 D2

• Claim:
– C1 and D1 consistent with EU (63%)
– C2 and D2 consistent with EU (5%)
– Which would you choose? – C1 and D2 inconsistent with EU (27%)
– C1 and D2 inconsistent with EU (5%)
• Significant violations of EU
– These violations are not random 

1
 4/8/2015

Common Consequence Effect Common Consequence Effect
1% $0 1% $0
A2
100% $16 vs 89% $16 10%  A1 100% $16 vs 89% $16 10% 
$18 $18

B1 $0 vs $0 B2

11% $16 10% 
$18
100 1
90 0.9
80 0.8
70 0.7
– Which would you choose? 60 0.6

50 0.5

40 0.4

30 0.3

20 0.2

10 0.1

0 0
A1 B1
A1 B1

2014 2015

Common Consequence Effect Common Consequence Effect
1% $0
A2
A1 100% $16 vs 89% $16 10% 
$18

$0 vs $0 B1 $0 vs $0 B2

11% $16 10%  11% $16 10% 

$18 • Claim: $18
– A1 and B1 consistent with EU (9%)
– A2 and B2 consistent with EU (64%)
– Which would you choose? – A1 and B2 inconsistent with EU (27%)
– A1 and B2 inconsistent with EU (0%)
• Significant violations of EU
– These violations are not random 

Common Consequence Effect And the winner is….
1% $0
A2
A1 100% $16 vs 89% $16 10%  • Stewart Sharpe
$18
• Randomly Selected Question: A
B1 $0 vs $0 B2
• You Chose A2
11% $16 10% 
$18

• Many people choose A1 and B2

2
 4/8/2015

And the winner is…. What do these violations mean?
• Stewart Sharpe C1 100% $8 vs 80% $10 $0 C2

• Randomly Selected Question: A 25% $8 20% 

D1 75 % $0 vs $10 80% $0 D2
• You Chose A2
E1 95% $8 76% $10 $0 E2

$0
1% $0
A2
– Often interpreted as a ‘preference for certainty’
89% $16 10% 
$18 – But what about E?

Class Exercise What do these violations mean?
C1 100% $8 vs 80% $10 $0 C2 C1 100% $8 vs 80% $10 $0 C2

25% $8 20%  25% $8 20% 

D1 75 % $0 vs $10 80% $0 D2 D1 75 % $0 vs $10 80% $0 D2

A2 E1 E2
95% $8 76% $10 $0
A1 100% $16 vs 89% $16 10% 
$18 $0
1
0.9
B1 $0 vs $0 B2 0.8
0.7
0.6
11% $16 10%  0.5

$18 0.4
0.3
0.2
0.1
0
C1 D1 E1

What do these violations mean?
C1 100% $8 vs 80% $10 $0 C2

25% $8 20% 
D1 75 % $0 vs $10 80% $0 D2

E1 95% $8 76% $10 $0 E2

$0