SBEE Seminar Series: Ted O'Donoghue

A Reconsideration of the Common-Ratio Effect and Probability Weighting

Abstract: 

O'Donoghue and fellow researchers re-examine the common ratio effect (CRE) and its apparent inconsistency with expected utility theory (EUT). The research team shows that if people have heterogeneity in both their preferences and susceptibility to choice noise, the range of possible CRE and reverse common ratio effect (RCRE) behaviors permissible under EUT is broad enough to accommodate much of the existing experimental literature. The research team develops a new experimental method that tests for the existence of CRE that is robust to choice noise and preference heterogeneity. The research team implements their proposed test and finds no evidence of systematic CRE across a range of probabilities and common ratios. The team validates their method by showing that the elicited valuations are correlated across methods, respond sensibly to changes in the expected value of the lottery, and significantly predict individual behavior when the same participants are presented with standard common-ratio paired choice tasks. Their results call into question the existence of a stable probability-weighting function that can be applied to a broad set of choices.

Speaker bio: 

Ted O’Donoghue is the Zubrow Professor of Economics in the Department of Economics at Cornell University. His research is primarily in the field of behavioral economics, a subfield of economics that incorporates insights from psychology and decision research into economics. Much of his research focuses on the domains of intertemporal choice and risky choice, and he has a strong interest in using behavioral economics to better understand economic field behaviors.

O’Donoghue joined Cornell in 1997. He served as Senior Associate Dean for Social Science in the College of Arts & Sciences from 2015-2018, and he also served as Co-Chair of the Provost’s Review of the Social Sciences at Cornell from 2016-2018. From 2009-2012, he was team leader for a Cornell Institute for Social Sciences theme project titled “Judgment, Decision Making, and Social Behavior.”

O’Donoghue holds degrees from Dartmouth (A.B. in Economics modified with Psychology, 1990) and the University of California at Berkeley (Ph.D. in Economics, 1996). He worked as a post-doctoral fellow at Northwestern for one year before joining the faculty at Cornell.

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