CRE Flashcards
(12 cards)
What is the Common Ratio Effect (CRE)?
It’s when people reverse their preferences between two lotteries after both are scaled by the same probability — violating the independence axiom.
How does Prospect Theory explain the CRE?
People overweight small probabilities (e.g. 1%) and underweight large ones — this leads to preference reversals when probabilities are scaled.
Key experiment supporting Prospect Theory for CRE?
A: Bruhin et al. (2022) — tested PT vs Salience vs Fechnerian models. PT fit best across all tasks.
What is the Common Ratio Effect (CRE)?
It’s when people reverse their preferences between two lotteries after both are scaled by the same probability — violating the independence axiom.
What does the independence axiom say?
If you prefer A to B, you should still prefer a 50/50 mix of A + C over B + C — the shared element (C) shouldn’t change your preference.
How does Prospect Theory explain the CRE?
People overweight small probabilities (e.g. 1%) and underweight large ones — this leads to preference reversals when probabilities are scaled.
Key experiment supporting Prospect Theory for CRE?
Bruhin et al. (2022) — tested PT vs Salience vs Fechnerian models. PT fit best across all tasks.
What is Salience Theory’s explanation for CRE?
People give extra weight to the most attention-grabbing outcome — this can reverse preferences when lotteries are dependent.
When does Salience Theory work well?
In dependent lotteries, where outcomes can be compared directly. Fails in independent lotteries.
Key evidence supporting and limiting Salience Theory?
Bruhin et al. (2022) — Salience only fits dependent lotteries. Mehta et al. (1994) — Salience matters in coordination games.
What do Fechnerian error models say about CRE?
People make random mistakes around stable preferences; CRE is just noise.
Empirical challenge to Fechnerian models?
Cubitt et al. (2004) — PT explained systematic reversals better than noise. Bruhin et al. (2022) — Fechnerian model fit data worst.
