Allais paradox - Wikipedia

submited by
Style Pass
2021-09-27 17:30:05

The Allais paradox is a choice problem designed by Maurice Allais (1953) to show an inconsistency of actual observed choices with the predictions of expected utility theory.

The Allais paradox arises when comparing participants' choices in two different experiments, each of which consists of a choice between two gambles, A and B. The payoffs for each gamble in each experiment are as follows:

Several studies[1] involving hypothetical and small monetary payoffs, and recently involving health outcomes,[2] have supported the assertion that when presented with a choice between 1A and 1B, most people would choose 1A. Likewise, when presented with a choice between 2A and 2B, most people would choose 2B. Allais further asserted that it was reasonable to choose 1A alone or 2B alone.

However, that the same person (who chose 1A alone or 2B alone) would choose both 1A and 2B together is inconsistent with expected utility theory. According to expected utility theory, the person should choose either 1A and 2A or 1B and 2B.

Leave a Comment