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

Federico Echenique; Gerelt Tserenjigmid

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arXiv · 2604.06050

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

Federico Echenique·Gerelt Tserenjigmid

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Abstract

McGranaghan, Nielsen, O'Donoghue, Somerville, and Sprenger [2024] show 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 argue 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 common models of stochastic choice. Applying this strong test to existing experimental data, we find that the common ratio effect remains highly prevalent.

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Federico Echenique, Gerelt Tserenjigmid. 2026-04-07. Robust Testing Of the Allais Paradox By Paired Choices vs. Paired Valuations. https://arxiv.org/abs/2604.06050

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