Topic2b - Topic IIB: Evidence that Contradicts Expected...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Topic IIB: Evidence that Contradicts Expected Utility Allais Paradox (Allais 1953) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Question 1: Option (A) Option (B) $1 million with prob. 1 $1 million with prob. 0 . 89 $5 million with prob. 0 . 10 $0 with prob. 0 . 01 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Question 2: Option (C) Option (D) $1 million with prob. 0 . 11 $0 with prob. 0 . 89 $5 million with prob. 0 . 10 $0 with prob. 0 . 90 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ The Paradox: The combination of choosing A over B and choosing D over C violates expected utility. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Ellsberg Paradox (Ellsberg 1961) Suppose an urn contains 90 balls: 30 of the balls are red. The other 60 balls are black or yellow, in unknown proportions. One ball will be drawn randomly from the urn. Question 1 : Option A: You win $100 if the ball is red. Option B: You win $100 if the ball is black. Question 2 : Option C: You win $100 if the ball is either red or yellow. Option D: You win $100 if the ball is either black or yellow. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ The Paradox: The combination of choosing A over B and choosing D over C violates expected utility — in particular, violates that people form stable subjective beliefs.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/01/2009 for the course ECON 3240 taught by Professor Lyons during the Spring '09 term at Cornell University (Engineering School).

Page1 / 7

Topic2b - Topic IIB: Evidence that Contradicts Expected...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online