PPE 10:26

PPE 10:26 - Allais paradox violates the sure-thing...

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Allais paradox – violates the sure-thing principle - People choose option 4 over option 3 Prospect theory: certainy effect Two stage game: When people pick the guaranteed 30, and then choose the 45 at 80% chance of winning, there is an inconsistency in choices - this transformation is called the pi function o diminishing sensitivity o in the middle, there is much less effect As if people say to themselves, it will either happen, it won’t happen, or it could happen (mush them together like there is no difference (difference between .2 and .25 is the same as the difference between .95 and 1) Buying a lottery ticket could be rational since it fulfills some goals of yours - addictive blackjack players understand that they are losing money, but they are having fun doing it, so they continue to do so Surcharge vs. Discount – positive or negative incentive to induce the same result Calling it a discount vs. surchange doesn’t make a difference Value function – people think about choices under risk as gains and losses
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This note was uploaded on 01/14/2012 for the course PPE 253 taught by Professor Mellers during the Fall '11 term at UPenn.

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PPE 10:26 - Allais paradox violates the sure-thing...

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