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Allais for the Poor: Relations to Ability, Information Processing, and Risk Attitudes

Aufsätze referiert extern - Web of Science

Tabea Herrmann, Olaf Hübner, Lukas Menkhoff, Ulrich Schmidt

In: Journal of Risk and Uncertainty 54 (2017), 2, S. 129-156


This paper complements evidence on the Allais paradox from advanced countries and educated people by a novel investigation in a poor rural area. The share of Allais-type behavior is indeed high and related to indicators of “lacking ability,” such as poor education, unemployment, and little financial sophistication. Based on prospective reference theory, we extend these characteristics by biased processing of probabilistic information. Finally, we reveal that Allais-type behavior is linked to risk-related characteristics, such as risk tolerance and optimism. This indicates a potential problem as exactly the more dynamic among the poor tend to make inconsistent decisions under uncertainty.

Lukas Menkhoff

Head of Department in the International Economics Department

JEL-Classification: D81;D03;O10
Keywords: Field experiments, Allais paradox, Socio-demographic characteristics, Prospective reference theory, First order stochastic dominance, Risk attitude, Optimism, Cognitive ability