Negative recency, randomization device choice, and reduction of compound lotteries

Abstract

We report an experiment in which subjects are not indifferent between real-money lotteries implemented with randomization devices that are equivalent under the Reduction Axiom. Instead choice behavior is consistent with subjective distortion of conditional probability, and this persists in treatment conditions that control for (i) computational limitations and (ii) possible confounding by ratio bias. --reduction of compound lotteries,negative recency effect,gambler's fallacy,law of small numbers,randomization devices,instruments and materials,design of experiments,St. Petersburg paradox