Title: Does correlation really matter in risk taking? An experimental investigation

Speaker: Jiakun Zheng from Renmin University.

Date: Monday 10 May 2021

Time: 8:30pm – 9:30pm (Beijing time)

Abstract:

Two prominent alternatives to expected utility theory, regret theory and salience theory, rely on the assumption that when a decision maker chooses between two lotteries, not only the marginal distribution of the lotteries, but also the correlation of payoffs across states impacts risk taking. Recent experimental studies on salience theory seem to provide evidence in favor of such correlation effects. However, these studies fail to control for events-splitting effects (ESE). In the first part of this paper, we seek to disentangle the role of correlation and event-splitting in two settings: 1) the common consequence Allais paradox as studied by Bruhin et al. (2018), and Frydman and Mormann (2018); 2) choices between Mao pairs as studied by Dertwinkel-Kalt and Koster (2019). In both settings, we find evidence suggesting that recent findings supporting correlation effects are largely driven by ESE. Once controlling for ESE, we find no consistent evidence for correlation effects. In the second part of the paper, we expand the investigation of correlation effects to previously unconsidered settings. We first test for correlation effects in a novel task that allows to detect correlation effects even when they are of second-order importance only. In this setting, we find a precisely estimated null effect. Finally, we demonstrate that when changing the correlation structure implies a change from state-wise domination to FOSD, this can lead to an increase in the number of suboptimal choices. The observed choice patterns contradict both salience and regret theory. Our results thus shed doubt on these theories but also provide evidence that correlation effects exist in some cases.