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Topic2b

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

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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

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

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