Robust Testing Of the Allais Paradox By Paired Choices vs. Paired Valuations

2026-04-07

AI Summary

This study addresses structural biases inherent in existing pairwise choice tests under random selection and questions the reliability of pairwise valuation methods. The authors propose a “strong” pairwise choice test that remains strictly unbiased under the standard random utility model. They further demonstrate that valuation-based tests exhibit intrinsic bias and insufficient predictive power within the expected utility framework. Leveraging random choice theory and expected utility models, the paper conducts robustness analyses using established experimental data to re-examine the common ratio effect in the Allais paradox. The findings confirm that the effect remains highly significant, thereby strongly challenging recent claims that have questioned its existence.

Abstract

McGranaghan, Nielsen, O'Donoghue, Somerville, and Sprenger [2024] argue that standard paired choice tests for the common ratio effect are structurally biased when choice is stochastic, proposing valuation tests as a robust alternative. Using valuation tests, they find no systematic evidence for the common ratio effect, seemingly overturning much of the extant literature. We evaluate this conclusion in light of stochastic choice theory. We demonstrate that valuation tests are inherently biased and lack predictive power under standard expected utility assumptions. In contrast, we advocate for a ``strong'' paired choice test, proving it remains robustly unbiased across standard models of stochastic choice. Applying this strong test to existing experimental data, we find that the common ratio effect remains highly prevalent.

Problem

• Allais Paradox
• common ratio effect
• stochastic choice
• valuation tests
• paired choice tests

Innovation

• strong paired choice test
• stochastic choice
• common ratio effect
• valuation bias
• Allais paradox