Why does the Allais paradox occur also among business students?

Abstract

The reasons for people making certain decisions has always been a question of interest among researchers. This paper presents a broad study in the field of Behavioral Finance on the topic of the Theory of Rational Choice under uncertainty. The main focus of this paper is to examine the factors which cause violation of one of the rational choice axioms – the independence axiom, also known as Allais paradox, among NHH (Norwegian School of Economics) Master’s students. The study discusses the theoretical and empirical significance of variables like gender, age, previous negative experience, financial obligations and the major profile in Master’s program in the decision making of students taking Master’s degree at NHH (Norwegian School of Economics). The key question which is examined throughout the whole research is what characteristics does the individual who is more likely to violate the independence axiom have. For the empirical study the logit model has been selected in order to provide the analysis on the probability of the responsiveness to the Allais paradox of an individual with certain characteristics. The responsiveness to the Allais paradox is examined by two lotteries: a lottery with potential gain and a lottery with potential loss outcomes. Each lottery is also examined by two regression models: first, the model which highlights the significance of gender and age in the decision making, and second, the expanded model which, additionally, examines the significance of previous negative experience, financial obligations and the major profile in studies on the responsiveness to the Allais paradox. The empirical study shows the significance of gender and age of the respondent on his/her responsiveness to Allais paradox in the basic model for the lottery with potential gain outcome. The expanded model has confirmed the link between the violation of independence axiom and the gender in the lottery with potential gain outcome. Additionally, the importance of experience and major in the studies has been confirmed. The study has also found the significant effect of age on the decision making in the basic model of the lottery with potential loss outcome and confirmed the importance of experience, financial obligations and major in studies in the expanded model for the lottery with potential loss outcome.