NONLINEAR PREFERENCES AND 2-STAGE LOTTERIES - THEORIES AND EVIDENCE

Nonlinear preferences models are theories for choice under risk which have weakened in one way or another the Independence Axiom of Expected Utility. in this paper we present an experiment designed to discrimin ate between some basic ideas in this literature. We tested the Between ness axiom, a weaker form of Independence, against an alternative whic h predicts that indifference curves in the probabilities simplex are c onvex along the lower edge and concave along the hypotenuse. We also c hecked whether preferences among single-stage lotteries, as those reve aled by our test of Betweenness, should be extended to preferences amo ng two-stage lottery via the classical Reduction of Compound Lottery a xiom or via the Certainty Equivalent Mechanism.