Reaction to Common Outcome Shifts: An Exploration of the Connection Between Ellsberg and Allais Paradoxes

The Allais and Ellsberg paradoxes are two of the most widely studied problems in individual decision-making, highlighting violations of expected utility for objective risk and subjective ambiguity. One notable similarity between the two problems is that both involve an outcome shift between questions whereby the outcome on one state is shifted from strictly positive to zero. Motivated by the observation that these problems, while structurally similar, yield qualitatively distinct outcomes, we systematically use paired valuation tasks to investigate the space between the two. To pin down the source of deviations, we introduce three intermediate tasks that vary across three parameter domains- 1) different payoff schemes, 2) objective or subjective probability of the state of the outcome shift, and 3) objective or subjective probability of the remaining states. Finally, we vary the objective probabilities of the Common Consequence problem that range from the tuples that coincide with the Ellsberg problem and the classic Common Consequence problem.