Consider two prospects. Problem 1: Choose between Prospect A: $2,500 with probability 0.33 $2,400 with probability 0.66 Zero with probability 0.01 Prospect B: $2,400 with probability 1.00 Problem 2: Choose between Prospect C: $2,500 with probability 0.33 Zero with probability 0.67 Prospect D: $2,400 with probability 0.34 Zero with probability 0.66 It has been shown by Daniel Kahneman and Amos Tversky (1979, “Prospect theory: An analysis of decision under risk,” Econometrica 47(2), 263-291) that more people choose B when presented with problem 1 and when presented with problem 2, most people choose C. These choices violate expected utility theory. Why?
Consider two prospects. Problem 1: Choose between Prospect A: $2,500 with probability 0.33 $2,400 with probability 0.66 Zero with probability 0.01 Prospect B: $2,400 with probability 1.00 Problem 2: Choose between Prospect C: $2,500 with probability 0.33 Zero with probability 0.67 Prospect D: $2,400 with probability 0.34 Zero with probability 0.66 It has been shown by Daniel Kahneman and Amos Tversky (1979, “Prospect theory: An analysis of decision under risk,” Econometrica 47(2), 263-291) that more people choose B when presented with problem 1 and when presented with problem 2, most people choose C. These choices violate expected utility theory. Why?
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.3P
Related questions
Question
Consider two prospects.
Problem 1: Choose between
Prospect A: |
$2,500 with probability |
0.33 |
|
$2,400 with probability |
0.66 |
|
Zero with probability |
0.01 |
Prospect B: |
$2,400 with probability |
1.00 |
Problem 2: Choose between
Prospect C: |
$2,500 with probability |
0.33 |
|
Zero with probability |
0.67 |
Prospect D: |
$2,400 with probability |
0.34 |
|
Zero with probability |
0.66 |
It has been shown by Daniel Kahneman and Amos Tversky (1979, “Prospect theory: An analysis of decision under risk,” Econometrica 47(2), 263-291) that more people choose B when presented with problem 1 and when presented with problem 2, most people choose C. These choices violate expected utility theory. Why?
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