WP 2012-01 Experimental Payment Protocols and the Bipolar Behaviorist

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Published in 2014 in Theory and Decision, Volume 77, Issue 3.

ABSTRACT. If someone claims that individuals behave as if they violate the independence axiom when making decisions over simple lotteries, it is invariably on the basis of experiments and theories that must assume the independence axiom through the use of the random lottery incentive mechanism. We refer to someone who holds this view as a Bipolar Behaviorist, exhibiting pessimism about the axiom when it comes to characterizing how individuals directly evaluate two lotteries in a binary choice task, but optimism about the axiom when it comes to characterizing how individuals evaluate multiple lotteries that make up the incentive structure for a multiple-task experiment. We reject the hypothesis about subject behavior underlying this stance: we find that preferences estimated with a model that assumes violations of the independence axiom are significantly affected when one elicits choices with procedures that require the independence assumption, as compared to choices elicited with procedures that do not require the assumption. The upshot is that one cannot consistently estimate popular models that relax the independence axiom using data from experiments that assume the validity of the random lottery incentive mechanism.