Decision Making Under Uncertainty: Some Experimental Evidence From Auditing

The dominant theory of individual decision making under uncertainty is the von Neumann and Morgenstern's expected utility model (EUM). Although, this model has gained its popularity from its ability to explain a wide range of attitudes toward risk, empirical evidence over the last three decades has documented paradoxical behavior that is inconsistent with the EUM model. The present study examines in an experimental setting individuals' inconsistent behavior in choosing between two pairs of lotteries known as the Allais paradox. This study extends previous literature on money gamble situations by conducting a series of experiments to test expected utility behavior on auditing student subjects in pure money and audit settings. Two variants of audit settings are examined: overall audit plan case and audit procedure evaluation of internal control case.