Rationality Crossovers By : Todd L . Cherry & Jason

Herein we further explore whether the power of arbitrage to induce people to exhibit more rational behavior extends to diverse decision-making tasks and stated valuation over preferences for gambles. We examine how arbitrage in a preference reversal setting affects behavior for the valuation of low probability food safety risks, the Allais Paradox, and the Ellsberg paradox. We design a three-stage experiment that elicits choices and values over gambles, with and without the experience of arbitrage. Our results suggest that a rationality crossover can exist – arbitrage in one setting can cross-over to affect the choices in unrelated tasks. Stated values for safer food dropped by 20–50%, and the frequency of the Allais paradox is cut in half. People acted more rationally by reducing their stated value for a lottery, or if monetary adjustments are impossible they adjust their choice away from the lottery. Rationality crossovers have their predicted limits in that the frequency of the Ellsberg para-dox, the most distinct decision environment, remained the same. We also found that the form of arbitrage as captured by stricter real market-like experience or a weaker version of cheap-talk (i.e., hypothetical) arbitrage did not affect the results. This paper shows that arbitrage-induced rationality can transfer across contexts. Todd L. Cherry & Jason F. Shogren (2007) "Rationality Crossovers" Journal of Economic Psychology Volume 28 Issue 2 [ DOI: 10.1016/j.joep.2006.12.002] Version of Record Available From (www.researchgate.net)