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American Economic Review Vol. 114 No. 2 2024

Distinguishing Common Ratio Preferences from Common Ratio Effects Using Paired Valuation Tasks

Christina McGranaghan1; Kirby Nielsen2; Ted O'Donoghue3; Jason Somerville4; Charles D. Sprenger2

1 Department of Applied Economics and Statistics, University of Delaware (email: ) · 2 Division of the Humanities and Social Sciences, California Institute of Technology (email: ) · 3 Department of Economics, Cornell University (email: ) · 4 Federal Reserve Bank of New York (email: )

Abstract

Without strong assumptions about how noise manifests in choices, we can infer little from existing empirical observations of the common ratio effect (CRE) about whether there exists an underlying common ratio preference (CRP). We propose to solve this inferential challenge using paired valuations, which yield valid inference under common assumptions. Using this approach in an online experiment with 900 participants, we find no evidence of a systematic CRP. To reconcile our findings with existing evidence, we present the same participants with paired choice tasks and demonstrate how noise can generate a CRE even for individuals without an associated CRP.

DOI
10.1257/aer.20221535
Volume
114
Issue
2
Pages
307-347
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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