FSS-DECO seminar: EU for the Lab

Speaker: Dr. Chi Chong LEONG, UM Macao Fellow, Department of Economics, Faculty of Social Sciences, University of Macau

Date: 10 Sep 2025 (Wednesday)

Time: 14:00-15:15

Language: English

Venue: E21B-G016

Abstract: A large literature has documented choices that are inconsistent with the standard assumption that agents maximise their expected utility (EU). Central to this issue is the independence axiom, which EU maximisers must satisfy but is often violated in practice. We characterise EU for lotteries with three outcomes, a setting that applies to many empirical tests of the independence axiom. Our approach considers three implications of the independence axiom, namely, monotonicity with respect to first-order stochastic dominance, best-outcome mixture independence, and best-worst replacement invariance. This characterisation then enables the design of experiments to identify specific aspects of the independence axiom that are particularly prone to violations. Our laboratory experiment demonstrates that, when the independence axiom is decomposed into these weaker properties, violations occur less frequently than generally considered: 70% of participants adhered to best-outcome mixture independence, and 65% to best-worst replacement invariance. When participants were given the opportunity to revise their choices, they corrected an average of 30% of initial violations—significantly higher than the 19% of initial adherences that were subsequently reversed. This suggests that violations may stem more from misunderstandings than from genuine preferences against these properties. Additionally, we find that the Common Ratio Paradox, a well-known example of violations of the independence axiom, is less pronounced under a different experimental condition, highlighting the importance of careful experimental design in understanding decision-making behaviour under risk.