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Related Experiment Videos

A simple test of expected utility theory using professional traders.

John A List1, Michael S Haigh

  • 1Department of Economics and Agricultural and Resource Economics, University of Maryland, College Park, MD 20742, USA. jlist@arec.umd.edu

Proceedings of the National Academy of Sciences of the United States of America
|January 7, 2005
PubMed
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Both students and professional traders violate expected utility theory in an Allais paradox experiment. However, traders from the Chicago Board of Trade demonstrated less frequent violations than students.

Area of Science:

  • Behavioral Economics
  • Decision Theory
  • Experimental Economics

Background:

  • Expected utility theory is a foundational model in economics.
  • The independence axiom is a key assumption of expected utility theory.
  • The Allais paradox demonstrates systematic violations of the independence axiom.

Purpose of the Study:

  • To compare decision-making behavior between students and professional traders.
  • To investigate the prevalence of Allais paradox behavior in different populations.
  • To test the empirical validity of the independence axiom in a real-world trading context.

Main Methods:

  • Conducting a classic Allais paradox experiment.
  • Recruiting participants from a student population and professional traders at the Chicago Board of Trade.

Related Experiment Videos

  • Analyzing behavioral choices to identify violations of the independence axiom.

    • Main Results:

    • Both student and professional trader groups exhibited behavior consistent with the Allais paradox.
    • The frequency of Allais paradox violations was lower in the professional trader group compared to the student group.
    • Findings suggest that market experience may influence decision-making under risk.

    Conclusions:

    • The independence axiom is systematically violated by both students and professional traders.
    • Professional traders appear to be less susceptible to the Allais paradox than students.
    • Behavioral economics research can inform our understanding of financial decision-making.