Rubinstein2005-page113

Rubinstein2005-page113 - October 21, 2005 12:18 master...

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October 21, 2005 12:18 master Sheet number 111 Page number 95 Expected Utility 95 A Discussion of the Plausibility of the vNM Theory Many experiments reveal systematic deviations from vNM assump- tions. The most famous one is the Allais paradox . One version of it (see Kahneman and Tversky 2000) is presented here as follows. Choose between L 1 = 0 . 25 [ 3, 000 ]⊕ 0 . 75 [ 0 ] and L 2 = 0 . 2 [ 4, 000 ]⊕ 0 . 8 [ 0 ] and now choose between L 3 = 1 [ 3, 000 ] and L 4 = 0 . 8 [ 4, 000 ]⊕ 0 . 2 [ 0 ] . Note that L 1 = 0 . 25 L 3 0 . 75 [ 0 ] and L 2 = 0 . 25 L 4 0 . 75 [ 0 ] . Axiom I requires that the preference between L 1 and L 2 be respectively the same as that between L 3 and L 4 . However, a majority of people ex- press the preferences L 1 L 2 and an even larger majority express the preferences L 3 Â L 4 . Among about 140 graduate students at Prince- ton, Tel Aviv, and NYU (in 2002–4), although they were asked to respond to the above two choice problems on line one after the other, 67% chose
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This note was uploaded on 12/29/2011 for the course ECO 443 taught by Professor Aswa during the Fall '10 term at SUNY Stony Brook.

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